November 30, 2009
CBO's Assessment of ARRA's Impact on Q3 Output and Employment
...Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the beginning of the year. But in CBO's judgment, that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects of ARRA.
In other words, the continued deterioration of the economy through the first few months after the passage of ARRA was not due to the stimulus package; rather underlying conditions had deteriorated, and the economy would have been in a worse state in the absence of the package. This is similar to the points I made here:   
Table 1 summarizes the CBO assessment:
Table 1 from CBO, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output as of September 2009 (Nov. 2009).
It is interesting to compare the midpoint of the ranges in this table against the CEA's first quarterly report (discussed in this post). For GDP, the CEA estimate is below the midpoint of the CBO. The CEA report's model based approach indicates 3.1 and 3.6 ppts increment (SAAR) in Q2 and Q3, implying 1.66% higher GDP. The midpoint of the CBO range is 2.2 ppts.
What about employment? CEA estimated 1.16 million cumulative jobs, by Q3. CBO estimates a range of 0.6-1.6, with midpoint at 1.1 million.
Reader Buzzcut chastises me for my "jihad" (his words, not mine) in defending the Romer CEA model-based calculations of jobs saved, and further, for not discussing the tabulations of jobs saved/created from Recovery.gov. On this latter criticism, my rejoinder is that those counts were not useful. CBO agrees:
Recipients report that about 640,000 jobs were created or retained with ARRA funding through September 2009. Such reports, however, do not provide a comprehensive estimate of the law's impact on employment in the United States. That impact may be higher or lower than the reported number for several reasons (in addition to any issues about the quality of the data in the reports). First, it is impossible to determine how many of the reported jobs would have existed in the absence of the stimulus package. Second, the reports filed by recipients measure only the jobs created by employers who received ARRA funding directly or by their immediate subcontractors (so-called primary and secondary recipients), not by lower-level subcontractors. Third, the reports do not attempt to measure the number of jobs that may have been created or retained indirectly as greater income for recipients and their employees boosted demand for products and services. Fourth, the recipients' reports cover only certain appropriations made under ARRA, which encompass only about one-quarter of the total amount spent by the government or conveyed through tax reductions in ARRA through September 2009. The reports do not measure the effects of other provisions of the stimulus package, such as tax cuts and transfer payments to individuals.
The report also includes a tactfully worded assessment of fully intertemporally-optimizing general equilibrium models, and their usefulness for real world analyses of monetary and fiscal policies in the short run.
Although some analysts favor the rigor of that approach to modeling behavior, other analysts view the assumptions underlying households' and businesses' decisionmaking in those models to be unrealistic and leading to unrealistic predictions. In particular, this type of model generally assumes that people are fully rational and forward-looking, basing their current decisions on a full lifetime plan. The forward-looking assumption implies that people expect to eventually pay for any increased government spending or reduced revenues in the form of future tax increases and that they incorporate those expected payments -- even if far in the future -- into their current spending plans. Thus, they are assumed to reduce their consumption when government spending rises, because their lifetime income has fallen by the amount of the eventual taxes. For the same reason, cash transfer payments and tax refunds have little or no effect on current consumption in such models. People in the models generally also have full access to credit markets, so they can borrow to maintain their consumption when faced with a temporary loss of income. This class of models does not typically incorporate involuntary unemployment: People can work as many hours as they choose at the wage rate determined by the market. Finally, in these models, monetary policy usually follows a fixed rule by which increased output or inflation implies higher real interest rates. [Emphases added]
This is a very clear exposition of CBO's analysis. Those who understood this post will find it very useful. Those unpersuaded by models should look elsewhere for succor.
[Update: Dec. 10]
WaPo, Nov. 26, 2009
Posted by Menzie Chinn at November 30, 2009 08:54 PMdigg this | reddit
Henry Hazlitt "Economics in One Lesson"
"...therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group hut for all groups."
"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."
What is seen:
"Recipients report that about 640,000 jobs were created or retained with ARRA funding through September 2009."
What is not seen:
Christina Romer "The Job Impact of the American Recovery and Reinvestment Plan" January 10, 2009.
"...even with the large prototypical package, the unemployment rate in 2010Q4 is predicted to be approximately 7.0%, which is well below the approximately 8.8% that would result in the absence of a plan." [Emphasis added]
NYTimes November 6, 2009 [note: "with the large prototypical package"]
"U.S. Unemployment Rate Hits 10.2%, Highest in 26 Years"
Posted by: RicardoZ at December 1, 2009 05:59 AM
Menzie--To pick up on your last para., if the CBO couldn't properly assess the then-current to very near term state of the economy early this year by their own admission, why would one expect their current assessment and longer term projection to be more accurate?
I do not doubt the CBO's objectivity or even their competence in using models, but as the CBO acknowledges about "involuntary unemployment," it is very hard for models based on theory and generalized experience with their tendency toward the mean to accurately capture a near-Black Swan event such as we have experienced over the last two years.
In this regard, I think Reinhart/Rogoff's historical empirical approach to looking at financial crisis-driven recessions (different than the usual recession) provides a better guide to expectations in this recession.
Now if someone could combine THAT historical experience with a theoretical model, I'd be listening more
Posted by: Terry at December 1, 2009 07:45 AM
Romer's quote says 2010Q4, which is a year from now. The New York Times quote is for right now. So her estimate is still plausible, no? I suppose the decreasing rate of the increase in unemployment isn't significant, Ricardo? It has to slow down before going the other way, right?
Posted by: ryan at December 1, 2009 07:57 AM
Think about what you are saying. Your implication is that Romer knew that the unemployment rate would top 10% in 2009Q4 with or without "stimulus" but will fall to 7.0 by 2010Q4. But the implication is that she also knew that even without "stimulus," it would fall to 8.8% in 2010Q4.
Do you actually believe that?
Posted by: RicardoZ at December 1, 2009 08:39 AM
That is very disingenuous at best. Romer's estimate was based on the forecasting consensus at the time among private sector economists. The government is not going to vary its forecast from that because they fear being out of the mainstream on their economic forecasts. The decline in real output was larger than anticipated in the first quarter and the job losses associated with those declines in real output were also larger than anticipated. For an unclear reason, job losses relative to declines in output have become larger in more recent business cycles than they have been historically.
As such, it is inappropriate to use those numbers as the basis of comparison when assessing the efficacy of the stimulus. The difficult when assessing against a counter-factual is that the counter-factual is very difficult to arrive at. The January estimates on the depth of the recession, which are what the original sales pitch for the stimulus were based on, were clearly incorrect. That's a deficiency in macroeconomic forecasting, not the stimulus.
Posted by: Brian Quinn at December 1, 2009 11:20 AM
The "jihad" comment concerns your continuing tilting at windmills with such names as Rush Limbaugh, Posner, and Politico (and now, of course, Buzzcut).
Posted by: Buzzcut at December 1, 2009 11:24 AM
I would be more inclined to agree with you if the massive "stimulus" give away had not been based on such mistaken projections. Also note that the "experts" all had the same foundational theory about the "stimulus" but many, in this I include myself, forecast a much higher unemployment than the "experts." If you understand classical theory you understand why unemployment has gone through the roof.
I do not see my comments as inappropriate at all if these "experts" are going to spend massive amounts of my money on their crack-pot economic theories, and get is massively wrong!
Posted by: RicardoZ at December 1, 2009 12:14 PM
It would seem that the stimulus remains something of a faith-based exercise. The range of potential employment effects--0.6 to 1.6 m jobs--is so broad that it hardly inspires confidence in the reader. The incurred debt, however, is entirely concrete.
Posted by: Steve Kopits at December 1, 2009 01:24 PM
that is what Dr. Krugman unfortunately and brutally misses in his modeling: he wants us to absorb a multigenerational debt load with no certainty on the outcome - other than saying Japan, Belgium and Italy "have done it too", but what about many other countries that tried and eventually defaulted? He ignores the very different demographic characteristics, the economic conditions and the timing associated with those other countries' (bad) decisions. More debt, with no fundamental change to the underlying root causes of the problem (income inequality, loss in quality of education, indiscriminate offshoring/outsourcing of jobs, encouragement of unproductive investments by the tax code, excessive leverage, lack of transparency in markets, timid support of alternative energy investment, excessive defense expenditure, lack of universal health care, etc, etc,) will just bring a delayed collapse to American society. Tons of debt just to bring more of the same unsound and unjust economic policies back?? no sir no.
Posted by: Hernan "El Perro" at December 1, 2009 05:49 PM
Just because the CBO underestimated the damage Team Bush did to the economy does not imply that their analysis of the stimulous is incorrect.
Posted by: spencer at December 2, 2009 05:54 AM
Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the beginning of the year. But in CBO’s judgment, "that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects of [the stimulus]."
GIGO. This stuff is self referential. For all the mistakes on recovery.gov, at least it is an attempt to measure the REAL effect of the stimulus, not just rerunning a model.
Posted by: Buzzcut at December 2, 2009 06:40 AM
You may have been in hibernations so let me give you some news - Bush is no longer our president. The damage he did is over. Now we either correct that damage of continue that damage. Currently the Obama administration is following the Bush game plan and reaping the same results, higher and higher unemployment.
Posted by: RicardoZ at December 2, 2009 08:20 AM
Buzzcut: I am puzzled. "Tilting at windmills" is described thus by Wikipedia: "Tilting at windmills is an English idiom which means attacking imaginary enemies, or fighting unwinnable or futile battles." But I do not regard Limbaugh, Posner or Lawler (or you) as enemies. The enemies are misinformation and innumeracy. Posner, in fact, is allied with my view in terms of fiscal policy.
Moving to innumeracy, which is the true enemy, let me quote from this reader (it may look familiar to you):
In defense of the "Blame it on Beijing" wing, even if the Chinese economy is smaller, their savings rate is ridiculously high. The pool of savings is quite large when contrasted to the miniscule US savings rate.
This is wrong. Incorrect. In your parlance, it is the GI in the "GIGO". Inspection of BEA data (table 5.1) indicates 2008 gross private saving at $2195.9 billion; using the data in Eswar Prasad's June 2009 paper, Chinese gross national saving is 2333.4 billion USD. Taking out the government component (about 7 ppts of GDP) leads to my estimate of Chinese gross private saving at 2030.9 billion USD.
I hope you do not mind my quoting you in the post. I had thought that when readers posted on the blog, they were inviting a two way conversation. If I am incorrect in that judgment insofar as you are concerned, I will refrain from quoting you further.
Posted by: Menzie Chinn at December 2, 2009 09:29 AM
Am I wrong? The Chinese have a much smaller economy, but more savings. With your one change, 7% smaller savings.
That's a lot of money sloshing around, which I think is the point of the "Blame it on Beijing" wing. Well, that and the fact that the Chinese have pegged their currency to the dollar, and need to recycle all those trade earned dollars into T-bills in order to maintain the peg.
But that's a comment for the other post.
Posted by: Buzzcut at December 2, 2009 11:45 AM
Buzzcut: Perhaps I misunderstand the phrase:
The pool of savings is quite large when contrasted to the miniscule US savings rate.
which seems to imply the Chinese pool of (private) savings is large relative to the US pool of (private) savings. But the US pool being actually larger than the Chinese seems prima facie to indicate that your statement is incorrect.
Posted by: Menzie Chinn at December 2, 2009 11:59 AM
Ricardo, do I actually believe that unemployment will not perpetually increase? Yes. Do I actually believe that the stimulus package is helping and will continue to help to reduce unemployment faster than without it? Yes. Do I actually believe that Romer's unemployment estimate for a year from now is plausible? Yes.
What do you believe?
Posted by: ryan at December 3, 2009 07:12 AM
It's not the most well written sentence.
Looking at that paper, Table 4, in '08, Chinese housholds saved damn near 40% of their income (?!?!). US households saved 3.9% (and I'm sure that that's the highest rate in many, many years).
The pool of that savings is $1T for China and a mere $342B for the US. I also see national savings at $2.3T for China and $1.7T for the US.
It is those numbers that are shocking, especially when you consider that the US economy is 3.5 times larger than the Chinese economy.
Posted by: Buzzcut at December 3, 2009 07:30 AM