Economic Model That Estimated That the Stimulus Would Create Jobs Now Says It Did


Before the stimulus was passed, White House officials touted estimates that said that blasting cash into the economy would give the economy a boost and help create jobs. Now, lo and behold, a report from the administration's Council of Economic Advisers says that, yes, in fact, the stimulus has worked largely as expected. How did the CEA come to this conclusion? By plugging numbers into an economic model very similar to the one they used to predict that the stimulus would create jobs. Thanks to the model's reliance on multipliers—which predict that each dollar of government spending will produce more than a dollar of economic activity—the result is that money spent is assumed to have generated beneficial effects.

Let me see what my model says…

As economic prophesying goes, this is a rather clever trick; the initial prediction is basically guaranteed to on target, or pretty close. But as reliable information about the effect of the stimulus, it's about as useful as a psychic hotline. As Harvard economics professor Greg Mankiw explains:

The CEA took a conventional Keynesian-style macroeconomic model and used those set of equations to estimate the effect the stimulus should have had. Essentially, the model offers an estimate of the policy's effect, conditional on the model being a correct description of the world. But notice that this exercise is not really a measurement based on what actually occurred. Rather, the exercise is premised on the belief that the model is true, so no matter how bad the economy got, the inference is that it would have been even worse without the stimulus. Why? Because that is what the model says.  The validity of the model itself is never questioned.

As the CEA report notes on page nine, it's actually rather similar to the Congressional Budget Office's reporting on the stimulus, although CBO director has been up front enough about his organization's methodology to caution that his office's reports do not constitute an independent check on the initial predictions. In the end, the best we can say about the stimulus is that no one really knows if it's working, or how well. So every time a government official touts the economic benefits of the stimulus, it's worth remembering that a prediction that a program would work is not the same as proof that it does.