Squaring the Culture

"...and I will make justice the plumb line, and righteousness the level;
then hail will sweep away the refuge of lies,
and the waters will overflow the secret place."
Isaiah 28:17

05/26/2010 (7:33 pm)

CBO Publishes Fiction Regarding the Stimulus

The Congressional Budget Office issued its quarterly report regarding the effect of the American Recovery and Reinvestment Act (ARRA), claiming that the ARRA spending has increased real (inflation-adjusted) GDP somewhere between 1.7% and 4.2%. Leftie blogs are reporting this as proof that the stimulus worked, including gloating from Washington Monthly’s Steve Benen:

There’s a word to describe a recovery effort like this: success.

Facing the greatest economic crisis in generations, the nation had two choices early last year: the Democratic stimulus or the Republicans’ proposed five-year spending freeze. We’re all very fortunate the latter was in the minority.

Even worse was Prairie Weather:

I don’t think even the toxic right can wiggle around those results.

These guys are beclowning themselves. The CBO report is an exercise in question-begging. All it does is run the actual spending numbers through a model that presupposes that Keynsian government-spending multipliers are correct, producing a range of results by changing the multipliers. In other words, they’re using a model to project what the spending did, not actually measuring economic output. Since the projections of what the stimulus would accomplish used exactly the same models, all they’re doing is reciting their theories and patting themselves on the back. Bruce Reidl of the Heritage Foundation explains, and Stephen Spruiell boldly predicts that each quarter’s CBO report will simply repeat the fiction.

In case you’re not familiar with Keynsian multipliers, allow me to explain briefly:

Keynsians argue that when individuals have money to spend, they save some of it, but when the government has money to spend, they spend all of it. They argue that by taking the money as taxes and spending it as government spending, more money reaches the economy — the difference being what the taxpayers would have saved. That’s how they claim that taking money out of the economy through taxation then re-inserting it through government spending actually stimulates the economy.

This is nonsense, in my humble opinion, because dollars saved do not disappear from the economy, they get cycled into capital formation. Capital formation results in expansion, and expansion occurs by way of spending. For instance, Widget Manufacturing builds a new plant by buying materials from suppliers, paying construction workers, etc. So saved dollars circulate just as readily as spent dollars, only they cycle through the banking system first.

I accepted the Keynesian multiplier when I first studied economics, because that’s what college freshmen do when their professors feed them an equation, but I’m not buying it now, especially with all the real-world examples of failed Keynesianism to work from. Those reading this who feel compelled to complain that I’m a nobody criticizing the uncontested brilliance of Nobel prize-winners should reread my post addressing that very point back in February 2009, when the Cato Institute took out a full-page ad in the New York Times listing the names of all the professional economists who simply don’t believe that the Kenysian multiplier has any relevance to the real world.

It is not clear that stimulus spending has done anything other than benefit Democratic party donors and bloat an already unmanageable deficit. It is abundantly clear that Democrats want very badly to claim that it has helped things. Those who use the CBO report to prove it, though, prove either that they have no idea what they’re talking about or that they have no scruples.

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1 Comment »

December 29, 2010 @ 12:26 pm #

[…] egregious: the CBO assessed the effect of the stimulus, not by examining actual results, but by running an economic model using the number of stimulus dollars as input, and applying Keynesian multipliers. In short, if think the CBO’s model is not a good model, […]

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