CBO on the Stimulus: "A net negative effect on the growth of GDP over 10 years."


NRO's Andrew Stiles flags this exchange from Congressional Budget Office director Douglas Elmendorf's testimony before the Senate Budget Committee ealier this week:

The quote that matters starts around 1:25, when Elmendorf says that, according to CBO's estimates, with the stimulus legislation in place, "the level of GDP would be a little lower at the end. That is, a net negative effect on the growth of GDP over 10 years." Elmendorf then confirms that CBO estimates that the economic drag will continue in the following decade: 

SESSIONS: And in the next 10 years, since you're carrying that debt and paying interest on it and the stimulus value is long since gone, it would be a continual negative of some effect? 

ELMENDORF: Yes, it would represent a drag on the level of GDP beyond that, if no other actions were taken. 

Caption contest.

As with all CBO's projections, you have to take these with a grain of salt, especially when you start looking out two decades into the future. I've been critical of the way folks have used the CBO's stimulus job-creation numbers in the past, and this sort of long-term economic forecasting is not the most precise tool either, to say the least. Counterfactuals—like asking what economic growth would have looked like the absence of the stimulus—probably tell us more about our current economic assumptions than about alternate economic timelines.

Still, it's worth noting, if only because even the mildly Keynesian congressional scorekeeper agrees that borrowing $800 billion dollars ultimately creates a drag on the economy and a net loss in economic performance relative to what otherwise might have been. And yet the administration went ahead with the legislation anyway, arguing that it would be more or less a free lunch in the long run. 

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  1. But none of the people making those decisions was personally hurt by the impact, so it’s all good.

  2. “…borrowing $800 billion dollars…”

    ~40% of stim monies were tax cutz

    1. I think you believe you’re making a point.

    2. Ive heard this before, do you have some kind of proof of that claim?

      1. broaden ur sources, beyond faux news & radio entertainment, by doing ur own research.

        1. Broaden your sources beyond Democrat talking points. May I suggest a dictionary to start with?

          1. aint no TP to restate the fact that ~40% of the stim monies were the payroll tax cutz. jeesch

            1. Great parody – fits nicely with Barton’s recent discourse on the lack of literacy among the young.

              Or were you serious with the “cutz”? If so, you are sad and pathetic. The future holds nothing for you, go find a rope and a stout beam and cure your subset of the worlds’ troubles…

    3. ~40% of stim monies were tax cutz

      Really? What exactly did the tax rate change to?

      1. If you’re GE, zero percent.

  3. Keynes RIP, once again. The third time was not a charm.

  4. Has anyone seen my surprised face? I cant find it anywhere.

  5. It’s a “net negative” right now–spending 10% of GDP in deficits to get a 2% growth rate is not a recipe for success.

  6. No that is exactly what I am talking about dude. Very cool indeed.

  7. They needed a bigger stimulus…..and more debt….and everything would be peachie-keen Europe okay.

    When you have a functioning economy, Keynesian stimulas can appear to work. But when your whole economy is a matter of borrowing…well, the well runs dry.…..uture-work

    1. Great links.

  9. The Oracle Of Democratic Part-i:

    “The CBO was 100% right about Obamacare, but they have been corrupted and are totally untrustworthy now.”


    “…then you squeeze your hands together and it sounds like a fart.”

  11. “This move, I call ‘the speculum’. In cattle, you have to make sure the cow is in estrus, but with an economy, that’s not necessary.”

  12. CAPTION:

    “…so then I dumped the airbrakes and he went over me and I ended up right in his six. While I was at the Fed I played that game so much, I got pretty good.”

    1. CAPTION:

      “And that’s it! The ‘hand jive’ really is that simple.”

  13. CAPTION (from All the Right Moves)

    Salvucci, he didn’t quit. None of us quit. I don’t know. We beat those guys asses up and down that field tonight! We got nothing to be ashamed of, right? Isn’t that right? Maybe the scoreboard doesn’t say it, but we won that game. We held them. It was just a fluke. That’s all. It’s just a fluke.


    “Ok, I’m going to start moving my hands apart..and you just say ‘when.’ I’m sure you’ve got nothing to be embarrassed about, Barry.”

  15. So the CBO is now saying what I said before it happened. Why dont I have a cushy DC job (other than the fact that I wouldnt accept it)?

    1. Of course, even joe acknowledged (sorta) that the long term effect was negative, he just didnt give a damn.

      1. because it wasn’t negative for government employees, the only thing altruistic joe cares about.

  16. Not shocking. The justification for fiscal stimulus rests on the fallacy of a multiplier effect due to increases in government spending.

  17. When you’re filling the pool at the shallow end by taking buckets of water from the deep end, sometimes a bit of the water sloshes out in the walk.

  18. I think references to “net negative” in the testimony may be misleading. It’s obvious that stimulus of any kind brings growth forward – i.e., increases near-term growth and decreases later growth. What isn’t clear from this testimony is whether, using a net present value type of analysis, net present GDP is greater with or without stimulus. And that’s largely a function of returns on investment (i.e., what kind of multiplier do you get from your stimulus) and one’s assumptions about the U.S.’s cost of capital (T-bill yields over time).

    I’m not saying the stimulus bill was necessarily NPV positive to GDP (I suspect, given incredibly low interest rates, it could have been had better choices been made, but ultimately wasn’t), I’m just saying that the testimony referenced in this post doesn’t seem to speak to NPV at all.

    If the argument against stimulus is that you are borrowing tomorrow’s growth and bringing it forward to today – that’s not really all that persuasive. Why not smooth out economic cycles to minimize hardships, etc.?

    But if doing so is a net negative to NPV GDP, that’s more persuasive (this could be because money is spent on useless projects with small multipliers, interest costs jump significantly, or the knock-on effects of the stimulus spending, such as hindering labor markets from adjusting quickly enough to, say, fully capitalize on the next “new new thing”).

    In any event, I think the title of the post and the points being made aren’t necessarily supported by the CBO analysis.

    But maybe I’m missing it?

    1. Why not smooth out economic cycles to minimize hardships, etc.?

      Because smoothing leads to lower long term GDP growth.

      1. Saying that stimulus lowers out-year GDP is both obvious and borderline misleading.

        Again, the relevant question is whether the stimulus bill was NPV positive for GDP. If it is, then it’s good policy; if not, then it’s bad policy.

        But the CBO report isn’t really speaking to whether the stimulus bill was NPV positive.

        All they appear to be saying is that we took some GDP from years 3-10 and used it in years 1-2, so GDP in years 3-10 will be less than it otherwise would have been.

        Not to put too fine a point on it, but.. Duh. It’s meaningless. But if the aggregate net increase in GDP in years 1 and 2 is greater than the PV “cost” of decreases to out-year GDP, then you have a decent policy argument.

        Put more simply – the testimony cited in this post doesn’t really make the case that stimulus is a bad policy choice, but the headline implies otherwise.

        That’s alls I’m sayin…

    2. Your thinking in terms of NPV doesnt make sense when thinking in the aggregate like this.

      NPV is, of course, translatable to NFV. And what is the NFV of GDP? The long term GDP.

      And in the really long run, growth rate ALWAYS wins out, so higher growth rate == higher future GDP == higher NFV == higher NPV.

      In short term actions that lower long term growth rates lower NPV.

      1. I dont think I explained that well, the concept is really clear in my head, but didnt come out exactly right.

        1. Just not sure I agree. The relatively small investment by DARPA in the technology that became the internet has an absurd NPV. Extensions of unemployment insurance, or tax cuts for people making gobs of money, not so much.

          For all we know, government training programs that help laid-off construction workers become nurse practitioners might be a great investment (NPV positive for GDP) because it helps labor markets adjust to demands for new workers. Government subsidies to banks meant to reimburse them a portion of the cost of changing bankruptcy law to allow underwater mortgages to be written down in a bankruptcy proceeding might be worthwhile from a GDP perspective because it increases labor mobility and debt overhang holding back consumption.

          The point is – I’m not convinced stimulus can’t ever work. (I’m not sure it ever actually HAS worked other than in war time, but that’s another story…)

          However, the post we’re commenting on doesn’t really make the point the headline implies.

          1. Wait, wait. The investments of DARPA, Cisco, M$, Google, even MCI-Worldcom before they were raided and looted, have high NPV. Had private industry not taken over, DARPA’s investment would be a neat way for grad students to share ANSI pr0n because the US gummint wouldn’t have built enough routers or laid enough cable to do anything useful on.

            1. Wasn’t claiming that private enterprise didn’t take the ball and run it 99 of the 100 yards, but DARPA gets huge credit.

  19. Caption 1: “Sir, I went downstairs to wait for the pizza guy, and he never showed up, but this is how I was planning to carry the pizza if he had shown up.”

    Caption 2: “So that IRS guy showed me how much money I forgot to pay them and it was a stack of hundreds about this high. Can you believe that shit?!”

  20. CAPTION:

    “If you do her from behind like this, though, you get shallower penetration than doing doggystyle on all fours.”

  21. CAPTION:

    Now, unlike the Temptations, the Pips used to do it this way.

  22. One point to remember is that we have now seen the short term effect of the Stimulus on GDP, and it is at most nil, and likely negative already! So the CBO was wrong on the initial impact of the Stimulus. How far off will they be on the long term effects? I dare say the negative effects after 10 years, if the first 2 years are any indication, will be VERY negative for economic growth, not just the little bit that Elmendorf endorses.

  23. Okay, so in the short run (less than 10 years) it was beneficial, but beyond that point it’s actually harmful. That’s the type of planning that is common in Washington. I agree that CBO projections are essentially meaningless because of all of the uncertainy and future legislation.

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