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Go here to read the latest piece of propaganda for the biggest piece of Keynesian stimulus to be proposed since the New Deal.
I and plenty of others have been telling you for days that this whole idea was a brainless, kneejerk response to a critical economic situation. There’s been no apparent analysis of the underlying assumptions, and utter disregard of the decades of experience and research indicating that Keynesian theory does not provide a perfect blueprint for increasing employment.
Now, Obama’s own economic team has proven this point far better than we in the political opposition can. They’ve produced an analysis, linked above, that is so shoddily constructed and so non-rigorous, that it can only be regarded as a marketing piece targeted at the ignorant, rather than a serious argument.
The authors of the report are Christina Romer, the designated chairperson of Obama’s Council of Economic Advisers, and Jared Bernstein, senior economics adviser to Vice President-elect Biden.
Bernstein isn’t an economist at all, so forget about him. But Romer is a very serious and sophisticated economist indeed. And much of her own published research over many years refutes both the assumptions and the findings of today’s report.
I imagine Christina Romer must be hiding her face in embarrassment today at what her new boss, Barack Obama, has forced her to do. She should be ashamed of herself.
And how should Congressional Republicans react to the stimulus proposal, in the wake of this analysis? Keep reading, and I’ll tell you.
What Romer and Bernstein have done is to assume that government spending has direct and indirect effects which operate to increase GDP. The assumption (right out of orthodox Keynesianism) is that artificial demand from the government increases supply.
They also assume that transferring money to the states has an equally powerful impact on GDP, consisting again of direct and indirect effects, both by enabling states to keep spending higher and taxes lower.
The direct effects of these stimuli are clear: we assume that demand creates supply. The indirect effects, as stated in Romer and Bernstein, are that newly-employed people spend (rather than save) their income, resulting in demand growth and job gains in unrelated industries.
The report acknowledges tax cuts to be of stimulative value only if they’re permanent. So to finesse the fact that none of Obama’s proposed tax cuts are actually permanent, the authors simply assume that they are. (This is a report with weasel language in every single paragraph, so it’s saying something to note that the strongest weasel language and admissions of uncertainty are in regard to their treatment of the tax-cut effects.)
Tax cuts produce no direct stimulative effect because, the authors assert without explanation, people tend to save them rather than spend them. Of course, as I said, the report assumes that money that people receive in income tends to be spent rather than saved. This is a terrific flaw in the methodology. There’s a very strong assumption at work here, that the Obama stimulus plan will *in itself* relieve the uncertainty that is driving consumers to save rather than spend.
There’s no acknowledgment whatsoever that consumers are responding to the challenging economic environment by increasing their savings rates, and that this will continue for a long time. There’s an implicit assumption that this recession does not feature a fundamental change in the pattern of consumer demand, and this is an enormous error.
There’s another huge problem in assuming that an increase in government demand will actually result in an increase in GDP. The supply-side insight, which Bernstein has excoriated in many writings, might actually be partially correct. You don’t get increased production by increasing demand. You get it by increasing returns to capital. Without very significant and permanent cuts in marginal tax rates on business and capital, which this plan does NOT propose, the whole adventure has the potential to produce massive inflation rather than stimulus.
And the authors breeze right past this fact when they note that their estimates assume that the Fed will continue its zero-interest rate policy rather than raising rates, as is normally done (to counteract inflation!) in times of fiscal stimulus. They’re goosing their own numbers.
On to the next assumption: that an increase in GDP necessarily produces a particular decrease in the rate of unemployment. They’re assuming that a 1% increase in GDP (the stimulus amount times a 1.5 multiplier) will create 1 million jobs. They don’t show their calculations, but the back of my envelope and a standard interpretation of Okun’s Rule suggests that they’re overstating the effect by anywhere from 1.5 to 2.5. More goosing of the numbers.
And then there’s the gender and union composition of the stimulated jobs. So far, only 20% of the jobs lost in the recession have been lost by women. But 42% of the jobs expected to be created by the stimulus will go to women. Clearly this is one stimulus that will have non-neutral effects on the mixture of new jobs to be created! Either that or there’s something really wrong with the analysis. How do the authors finesse this anomaly? They lamely suggest that their calculations are probably incorrect.
But they don’t think there’s anything to apologize for in their expectation that union jobs will be overrepresented in the construction and manufacturing jobs that are expected to figure disproportionately in the outcome.
Bottom line: the Obama team is far overestimating the effect of income growth on consumption, far overestimating the effect of stimulus on GDP growth, and far overestimating the impact of GDP growth on job creation. And they’re smart people so they have to know that they’re doing this.
They’re walking way far out onto some very thin ice. This stimulus is going to have very disappointing effects. Republicans would be well advised not to block the plan, which is politically unstoppable, but in no way to support it. It should pass in Congress with no Republican votes.