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Sep 5, 2010

Romer is Theoretically Correct

Fred: How many stimulus jobs have we created?
CBO: Just a second (runs computer program model).
      2,343,458 jobs.
Fred: Did you just scan a detailed database of collected information?
CBO: No. The model always says that.

Christina Romer is Mystified
09/02/10 - Ann Althouse

Christina Romer has resigned her post as chair of the White House Council of Economic Advisors, a top advisor to President Obama. The quotes below from The Washington Post are supplied by Ms. Althouse. I have edited and paraphrased.

WPost:  Romer acknowledged that she and her colleagues did not realize how quickly and strongly the financial crisis would affect the economy.

Romer:  To this day, economists don't fully understand why firms cut production and labor as much as they did. Almost all analysts were surprised by the violent reaction [1].

Althouse:  Every damned thing that happens is declared "unexpected".

WPost:  That miscalculation, in turn led to her miscalculation that the stimulus package would keep unemployment under 8%. Romer had predicted unemployment of 9.5% without stimulus [2]. The plan passed, and unemployment went to 10%.

Althouse:  Unexpectedly and mystifyingly, it was quite a surprise.

Romer:  The Council of Economic Advisers has reported to Congress widespread agreement that the act is broadly on track.

I will never regret trying to put analysis and quantitative estimates behind our policy recommendations [3].

Althouse:  A negative interpretation: They started with a policy preference, then rustled up numbers to support it. So, it is not surprising that the quantitative analysis was second-rate [4].

[1]  "Almost all analysts were surprised" means "My friends and I were surprised".

Romer just didn't know, but she was willing to guess. She was willing to recommend borrowing and spending $800 billion for a giant experiment on the people of the United States, the people who would have to pay back the borrowed money.

The constant "surprise" in government anouncements gives the impression that the Obama administration had a reliable, practical basis for expecting something better and different.

Their excuse: The bad news is so unusual and unexpected this time. Don't blame us.

[2]  Unemployment would be less than 8% with stimulus, or 9.5% without.

These are precise numbers. It would be a breakthrough to see the analysis in writing, to learn something, study the results, and do better next time.

I don't think Romer's analysis would impress an ordinarily intelligent person. I think Romer and her staff looked at charts of economic quantities during past recessions. They applied the Keynesian theory of the moment, wrote down a few formulas, and recommended giant spending.

Spending is always agreeable to politicians. It is like recommending ice cream to an overweight person, to increase his energy for later exercise.

I would like to be proved wrong on this. Where is the written analysis on which Romer based her recommendations to the President? Why aren't Romer and Obama proud of their work?

[3]  "I will never regret trying to put analysis and quantitative estimates behind our policy recommendations."

Why is Romer thinking about regret? I think every member of Obama's political team came into her office at some time and asked "Why-Oh-Why did you have to put a number on your recommendations, and then be so wrong? We could have advised you. We are wrong all of the time, but it doesn't matter when we don't give a number."

The word "trying" jumps out at me. To quote the character YodaDo or do not, there is no try. Did Romer have analysis, data, and past examples sufficient to risk the U.S. economy? If so, she would have said "I stand by the analysis supporting my recommendations". As it is, she won't regret "trying" to produce a good analysis.

Possibly, I should thank her for taking a chance on something new in government work. She "tried" to put analysis and quantitative estimates into policy recommendations. She implies this was a new thing within the White House Council of Economic Advisers.

[4]  Althouse: It is not surprising that the quantitative analysis was second-rate.

AMG: Just how second-rate is revealed in the following offical report.

Estimate of Jobs Created

Estimates Of Job Creation From The American Recovery And Reinvestment Act Of 2009 - May 2009  (pdf)
Executive Office Of The President: Council Of Economic Advisers.

To estimate the likely impact of the fiscal stimulus on real GDP, we used multipliers that we feel represent a consensus of a broad range of economists and professional forecasters.

The final step is to take the effect on GDP and translate it into job creation. Not all of the increased output reflects increased employment: some comes from increases in hours of work among employed workers and some comes from higher productivity. [And some is wasted -AMG]

We therefore use the relatively conservative rule of thumb that a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs, or about three-quarters of a percent. This has been the rough correspondence over history and matches the Federal Reserve Bank model reasonably well.


Huge Problem

This report is not worthy of being called an analysis. It considers only the possible increased employment from government spending. It does not mention or consider the bad effects of government borrowing and increased taxes, or the → deadweight lossThere is a $200-$300 loss in production (salaries and jobs) from raising tax rates to get an extra $100 in tax collected. This is the Deadweight Loss of taxation. It is what is never produced, or what goes into extra accounting and legal fees, because taxes are raised. We end up with more paper and politics, and less consumer goods and jobs. from collecting more taxes.

Increased employment is possible, but the borrowing and taxes are certain. Any increased employment ends when the stimulus spending ends. The borrowed money plus interest must be repaid regardless, through higher tax collections.

John:  You will love the $20,000 boat I bought.
Mary:  You spent the college fund?
John:  Relax, I borrowed the money.

Big Problems

  • Multipliers of What?

    The Report lists multipliers for Government Spending (say 1.5) and for Tax Cuts (say 1.0). These multipliers say that Government spending is much better than tax cuts, but better at what?

    First, Romer believes (Kenesian Economics) that $100 of government spending produces (magically, eventually) $150 in increased production and jobs (GDP or Gross Domestic Production). She also believes that $100 in consumer spending does the same thing.

    She wants to get the government involved because the government can force consumers to spend by borrowing and spending the money. The money will need to be repaid, but the benefits in the meantime are supposedly worth it. →They aren't worth it.03/2009 - Cargo Cult Economics
    Obama's and the government's most harmful economic myth is that savings are bad, and that only spending improves an economy. Spending transfers current production, but savings buys the equipment and business expansion that directly produces jobs and future production. The reason that government taxation and borrowing is bad is exactly because these use up savings and direct savings toward bad investments.

    Romer is saying that the government spends all $100 when it collects $100 in taxes. When the government cuts taxes by $100 or leaves the taxpayer with $100, the taxpayer spends $66 and saves or invests $34. So, the government is much better at spending all of the taxpayer's money than the taxpayer is.

    Amazingly, this is the same Christina Romer who authored the study →The Macroeconomic Effects Of Tax Changes - March 2007See Section VI. Conclusions, p.41
    Romer states the equivalent, that a $1 tax increase reduces GDP by $3.
      which concludes that $1 of tax cuts raises GDP by about $3. The reason is that people invest and work more when taxes are lower.

    Romer's 2007 study is detailed and thoughtful. What did a top government position do to her? I think Althouse is correct in [4] above.

  • GDP As an Accounting Entry

    Greater production is associated with prosperity. The money spent by consumers is a vote about the usefulness and quantity of what is produced. Consumers choose to buy only the things which are useful to them, that were worth producing and buying.

    The freedom of choice to buy or not buy gives GDP its good associations. So, it is crazy to believe that everyone will be better off by forcing them to buy because that raises GDP.

    Government spending adds to GDP by definition on paper. It adds to real prosperity only if the government buys things that are as useful as what an individual would freely purchase. When the government buys something that is only slightly useful, →we call that a waste of resources07/25/10 - LegalInsurrection
    You will recall my now-classic post about the miles of sidewalks leading from Warren, Rhode Island to the Massachusetts state line. A stimulus project.
    , and no one is going to buy more when the government stops buying. Any "stimulus jobs" which produce that item will disappear after the government stops buying.

    Here is stimulus thinking: A prosperous economy supports jobs in restaurants and tourism. Many of those jobs have disappeared due to weak demand. The government will restart the economy by borrowng money to buy more meals and tours. Afterwards, everyone will be better off.

    In reality, taxes go up to pay for the debt created by the government. This reduces the money available to freely buy meals and tours, and that demand collapses even further. Worse, every productive person and investor acts in fear that the government will do this again. They work and invest less, shrinking the economy and lowering useful GDP.

  • Spending As An End In Itself

    The Report has things fundamentally, crazily backwards. We don't spend money to create jobs, we organize jobs to provide useful things. We should apply the least resources (money) that we can toward producing those useful things.

    The result of spending is what is produced. That is it. The money is not fairy dust spreading wealth to whoever touches it. The money represents say a basket of groceries that is traded in exchange for producing those useful things.

    At best, government spending buys absolutely necessary things such as military arms that only a government can control. At worst, government passes out money to friends and contributors, producing little of value to the general society, under the cover story of producing jobs.

    Every dollar of government funds has been or will be taken from someone who has produced, or will be expected to produce something useful. He has worked hard for that dollar that the government takes away in taxes.

CBO Creates Jobs On Paper
03/17/10 - Cato@Liberty - Daniel J. Mitchell [edited]:

Doug Elmendorf is Director of the Congressional Budget Office (CBO). He basically agrees with me, that their employment model simply spits out pre-determined numbers, regardless of what happens in the real economy. The CBO recently estimated that so-called stimulus spending generated jobs and growth.

Someone asked Elmendorf, would the CBO model be unable to detect whether the stimulus failed. After hemming and hawing, and a follow-up question, Elmendorf confessed "that’s right".

(See this at 39:00 on the C-Span video at the link)

Our economic future is being analyzed by CBO models that are entirely theoretical and are not compared to the reality that they are supposed to predict. The CBO "scores" Congressional legislation, telling us how much legislation will cost and how much it will "reduce the deficit".

This does not inspire in me a warm feeling of trust.

NY Times and Washington Post: CBO Numbers Stink
03/19/10 - The Lid by Sammy Benoit

[edited]  Democrats worked with the nonpartisan Congressional Budget Office for more than a year, fine-tuning the bill in the last weeks. And, they consulted repeatedly with the bipartisan staff of the Joint Committee on Taxation.

The CBO found that cost and deficit targets would be missed. So, Democrats adjusted parts of the legislation to meet their goal.

Here are two of their tricks.

  • The first ten years of increased taxes are applied to only six years of costs.
  • $500 billion of Medicare savings are counted twice.

The CBO Scores Congressional Legislation

A fly on the wall:

CBO:  The MedHelp bill spends $1 trillion and increases what you must borrow, the deficit, by $230 billion.

Politician:  What if I tell you that we will stop paying the doctors, saving an additional $400 billion?
CBO:  Can you really do that?

Politician:  Just assume that I can. I'll write it into the margin.
CBO:  Then, the bill spends $1 trillion and decreases the deficit by $170 billion. It raises taxes by $770 billion, and saves $400 billion on the doctors.

Press Conference:  The bi-partisan, non-partisan, mathematical, unbiased, technoid, trustworthy, very smart CBO has just scored the MedHelp bill. Ladies and Gentlemen and Republicans, this bill delivers medical help to everyone, and reduces the deficit by $170 billion. How could any intelligent person be against it?

Spending Hurts, Not Just Deficits
12/15/09 - Cato@Liberty by Daniel J. Mitchell

Politicians fixate on the deficit to pull a bait and switch. They claim that they can raise taxes to solve any problem. That only replaces debt-financed spending with tax-financed spending. The likely result is that the required tax increases will weaken the economy and make us all poorer.

The Real Tax Burden
01/13/09 - EasyOpinions

The real tax burden is everything that the government spends. It is your money, now or in the future. Borrowing delays taxes while paying interest, just like a credit card.

You may think that some other rich guy is paying those taxes, not you. Don't be surprised if those guys buy fewer things from your employer. Where does that leave your job prospects?

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