Today the White House patted itself on the back for an economic ‘stimulus’ which they claim is proving incredibly effective at restoring economic growth:
Estimates of the impact of the ARRA made by comparing actual economic performance to the predictions of a plausible, statistical baseline suggest that the Recovery Act added roughly 2.3 percentage points to real GDP growth in the second quarter and is likely to add even more to growth in the third quarter…
This analysis indicates that the ARRA and other policy actions caused employment in August to be slightly more than 1 million jobs higher than it otherwise would have been.
The primary reason that things are going so swimmingly is that the White House is pumping money into the economy:
We find that as of the end of August, $151.4 billion of the original $787 billion has been outlaid or has gone to American taxpayers and businesses in the form of tax reductions. An additional $128.2 billion has been obligated, which means that the money is available to recipients once they make expenditures.
So by virtue of Barack Obama’s policies, somewhere between $151 and $280 billion has been spent by Uncle Sam. But how can the White House be so confident that the plan is ‘working?’ The bright minds at the Council of Economic Advisers compare current reality to a hypothetical baseline – a baseline of what would have happened without the spending:
To address this issue, in this section we present a sensible statistical forecast of the likely path of GDP and employment in the absence of stimulus. We can then interpret the discrepancy between this forecast and actual developments as a measure of the impact of policy.
The good news is, this baseline is accurate; you have their word on that. It’s not like the last one – the one that showed unemployment never touching 8 percent as long as we passed the ‘stimulus.’ Even the White House will admit that one was wrong. But even though the CEA was comically wrong on that one, you can trust that this hypothetical baseline is right.
One way that the CEA calculates jobs created is through a multiplier. It’s assumed that when the federal government pours money into the economy, there is a correlation between federal spending and economic activity.
A natural way to estimate the effects of the ARRA on employment and GDP is to use existing estimates of the macroeconomic effects of fiscal policy. This was one approach used by the CEA to estimate the likely effects of the Act based on the information available soon after the Act was passed. This methodology uses mainstream estimates of economic multipliers for the effects of fiscal stimulus.
But while the Obama administration asserts that it has spent something less than $280 billion of the stimulus bill so far, the ‘stimulus’ is not the only federal policy effectively ‘putting money’ into the economy. Every dollar that the federal government does not take out of the economy through taxation is effectively a dollar it puts into the economy – at least for the purposes of this discussion. If Barack Obama had raised taxes by $200 billion for example, it would reduce economic growth by some amount.
So if the Obama administration is going to take credit for some hypothetical number of jobs created by the money it put into the economy, we ought to consider other policies that create economic growth by putting money into the economy – for example: the Bush tax cuts.
According to a 2007 estimate by the Congressional Budget Office, President Bush’s 2001 and 2003 tax cuts are putting $245 billion into the economy this year, and $269 billion next year. What is the economic effect of the Bush tax cuts? We can’t know – this entire discussion is hypothetical. I suspect that some bright Member of President Bush’s economic team could give an estimate. But there is no question that it is having an effect. After all, who thinks the economy would be doing as well or better if we raised taxes by $245 billion this year?
In fact, before she became Chair of President Obama’s Council of Economic Advisers, Cristina Romer argued that tax cuts did more to spur economic growth than federal spending. So going by her guidelines, it’s likely that George Bush’s tax cuts are now spurring more growth and creating more jobs than Barack Obama’s spending.
If Barack Obama wants to base his presidency on ‘what ifs’ and calculations of how many angels fit on the head of a pin, then we should welcome that argument. Democrats opposed President Bush’s tax cuts from the get-go, and are eager to repeal them. But if Barack Obama wants to claim credit by saying that the economy would have been worse without his policies, then let’s figure out how much worse it would have been without Bush’s policies.