Questions and Observations

When you accuse someone of stupidity, it’s probably wise to avoid saying something stupid yourself while doing so.  Sadly, E.J. Dionne fails to avoid that trap.

Our discussion of the economic stimulus is another symptom of political irrationality. It’s entirely true that the $787 billion recovery package passed last year was not big enough to keep unemployment from rising to over 9 percent.

But this is not actually an argument against the stimulus. On the contrary, studies showing that the stimulus created or saved up to 3 million jobs are very hard to refute. It’s much easier to pretend that all this money was wasted, although the evidence is overwhelming that we should have stimulated more.

Very hard to refute?  That’s nonsense on stilts.  Mr. Dionne may be so smart that rays of light emanate from his brow, but the paragraph above is an extraordinarily foolish position.

First, any statement of any jobs “created or saved” requires that we perform the impossible task of modeling how the economy would have performed in an alternate universe where a different policy mix was applied. We literally have no idea–nor any way to construct a testable hypothesis–that models how the economy would have reacted in the absence of the stimulus.  Even the Congressional Budget Office, while rather supinely delivering a report that ostensibly supported the administrations claims about job creation, was careful to note:

…it is impossible to determine how many of the reported jobs would have existed in the absence of the stimulus package.

Second, the methodology was extremely suspect.  In making its predictions of post-stimulus recovery, the administration simply plugged in an assumption about the multiplier effect of government spending.  They assumed that X amount in spending would result in Y% increase in aggregate demand, resulting in Z jobs.  What the CBO did in checking up on that prediction, was to plug essentially the same assumptions into their model, which, unsurprisingly, “confirmed” the predictions. Even the CBO seemed a bit embarrassed about that.

But the CBO, to its credit, has been fairly forthcoming about its methods and their limitations. In response to a question at a speech earlier this month, CBO director Doug Elmendorf laid out the CBO’s methodology pretty clearly, describing the his office’s frequent, legally-required stimulus reports as “repeating the same exercises we [aleady] did rather than an independent check on it.” CBO tweaks its models on the input side, he says—adjusting, for example, how much money the government has spent. But the results the CBO reports—like the job creation figures—are simply a function of the inputs it records, not real-world counts.

Following up, the questioner asks for clarification: “If the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis, right?” Elmendorf’s response? “That’s right. That’s right.”

In other words, the CBO’s regular, legally-mandated reports, are estimates based on an economic model that doesn’t actually take inputs from the real world. They simply take the same estimates the administration used to create their predictions, then apply them to the monthly spending report, coming up with a number of jobs “created or saved” that is, unspurprisingly, exactly what the administration predicted.

Please note: this has no actual relationship to the number of real-world jobs that exist.  The only thing the CBO reports prove–by its own admission–is that it is possible to replicate the administration’s predictions by  duplicating the assumptions.

So, not only is it untrue, as Mr Dionne asserts, that “studies showing that the stimulus created or saved up to 3 million jobs are very hard to refute,” the CBO director explicitly refutes that notion by agreeing that “[i]f the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis.”

But, let us say, arguendo, that Mr. Dionne is right, and the $787 billion did, in fact, create 3 million new jobs.  The price tag then, comes to $262,333.33 for each job created. That seems like a relatively steep price.

Happily, we know more or less precisely how many people are employed in the country, and how the size of the labor force has changed. We know this, because the Bureau of Labor Statistics releases those figures on a monthly basis, and they are publicly available at the BLS web site.  If we assume March 2009 to be the first month of the stimulus, we see that there were a total of 140,854,000 Americans over the age of 16 employed, including farm employment.  As of Jun, 2010, there were 139,119,000 Americans working. That tells me that there are 1,735,000 fewer Americans working today, than there were when the stimulus was passed.  If we exclude agriculture, and look at only non-farm payrolls, we see that there were 132,070,000 people employed in March, 2009, vice 130,470,00 in June, 2010.  Again, that’s a net loss of 1,600,000 payroll jobs.

I’m not seeing any net job creation there.

In at least one sense, though, Mr. Dionne is quite right.  Since the administration’s claims of 3 million jobs “created or saved” is empirically disprovable, they can tout them as much as they’d like, even in the face of 1.6 million jobs actually disappearing under the stimulus.  After all, they can always say, “There would have been 3 million fewer jobs if we hadn’t acted.  And if you don’t believe me, prove me wrong!”  It is, after all, so comforting to be able to take refuge in an unfalsifiable hypothesis.