Curtis Dubay and J.D. Foster, Ph.D.
August 24, 2012
The Congressional Budget Office (CBO) just released its latest concocted quarterly estimate on President Obama’s failed stimulus. CBO’s
The story doesn’t change, because CBO’s faulty analysis doesn’t change. Each time CBO does an estimate, it is begging the question, because it is using the same models to evaluate the stimulus’s effectiveness as it did to predict how the stimulus would impact the economy before Congress passed it.
These models assume that deficit spending is stimulative, so when CBO runs the models they find—you guessed it—that deficit spending is stimulative. All CBO has really shown is that they’ve run their models correctly.
As we’ve written before, CBO’s method is akin to asserting that if you spun around in place 1,000 times really, really fast in the opposite direction to the earth’s rotation, the earth would actually reverse its spin. So you try it. You spin around 1,000 times. Then, having seen your performance, I announce emphatically that the earth is now in fact spinning in the opposite direction as it was. (Please ignore the fact that the sun continues to traverse the skies exactly as it has for billions of years.)
In this latest report based on faulty reasoning, CBO found that in the second quarter of 2012, the stimulus:
- Raised real (inflation-adjusted) gross domestic product (GDP) by between 0.1 percent and 0.8 percent;
- Lowered the unemployment rate by between 0.1 percentage points and 0.6 percentage points;
- Increased the number of people employed by between 0.2 million and 1.2 million; and
- Increased the number of full-time-equivalent jobs by 0.2 million to 1.3 million. (Increases in full-time-equivalent jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)
Really? It’s plain to every American—and especially the 12.8 million unemployed workers—that the stimulus failed. Yet CBO wants us to believe that it has had the beneficial impacts listed above.
The assumption at the bottom of the CBO’s mistake is that deficit government spending stimulates demand, which stimulates the economy. To be sure, when government spends money, the money is spent, and when government gives money to others, they spend much or all of it. The recipients then have more to spend and they spend it, and on and on, producing the so-called multiplier.
So far so good. But where did the money come from when not from tax revenues? Thin air? No. It came from borrowing, which means it subtracted from the pool of saving that individuals and businesses would otherwise have tapped to—wait for it—spend. And so government borrowing reduces private borrowing, which reduces private spending, which means less is received, which means less is spent, and on and on—the reverse multiplier.
The flaw in the Keynesian approach at the heart of the CBO model is embodied in this simple equation: 1 – 1 = 0. A dollar of deficit spending (and its multiplier) is offset by the dollar borrowed (and its multiplier), leaving a net of zero effect.
You would think by this point CBO would be embarrassed enough to come up with a more defensible way to evaluate the stimulus. But CBO appears immune to embarrassment. CBO should drop its faulty methods suggesting the stimulus succeeded when the American people can see with their own eyes that the stimulus failed.