Emperor, No Clothes

(Recycling an old post with new data and a new link.)

Back in January, shortly before the inauguration, the incoming Obama economic team issued a (PDF) report "The Job Impact of the American Recovery and Reinvestment Plan" advocating passage of the legislation before Congress. Central to the argument was Figure 1, showing their prediction of the unemployment rate with and without the plan (click for original size):

[Projections]

There were plenty of reasons to be skeptical then (see Greg Mankiw in the January 10 NYT, David Harsanyi in the January 30 Denver Post, or this handy collection of links from the Cato Institute.)

But "they won", the American Recovery and Reinvestment Plan was passed and signed, and … now, about five nine months later, some bright person ("Geoff" at Innocent Bystanders) has overlaid the actual unemployment data points on the original graph. The result (click for big version):

[vs. Actual]

So: Does stimulus spending work? Find out by reading a column by Robert J. Barro and Charles J. Redlick in yesterday's WSJ, helpfully headlined "Stimulus Spending Doesn't Work". The assumption behind the "stimulus" was that government spending "multiplies" through the economy, expanding GDP by more than the amount of spending. But, Barro and Redlick conclude:

The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

The problem, of course, is that tax rate reductions allow normal people to make their own private decisions on how/where to spend their own money. That's completely contrary to the underlying ideology of the current folks in charge. For one thing, it doesn't involve putting up lots of signs with politicians' names on them next to "stimulus" projects.

So you wind up with… well, with what we have now. Enjoy, Obama voters.


Last Modified 2012-10-05 9:10 AM EST

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