The AP's Calvin Woodward peels back the curtain a bit on what goes into all the claims about what the stimulus may or may not do. All such predictions are based on models that are built on assumptions whose dependability we really don't know.
But precise trajectories are impossible to plot and even approximations can be wildly off, as the authors of these forecasts acknowledge, usually more readily than the policymakers who use them to promote the plan.
Flip through the stacks of economic analyses underpinning the stimulus plan and you find a lot of throat-clearing qualifications and angst:
_"Very uncertain."
_"Difficult to distinguish among alternative estimates."
_"We confess to considerable uncertainty."
_"Subject to substantial margins of error."
In other words, who really knows?
Economic modeling may prove to be a haywire navigational device in this crisis.
"Large fiscal stimulus is rarely attempted," Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, told lawmakers. "For those reasons, some economists remain skeptical that there will be any significant effects, while others expect very large ones."
Zero to nirvana? Even for economists, who routinely differ among themselves, that's a range beyond the norm.
....Assumptions are piled atop assumptions, rules of thumb, historical experience, theory and more than a little hope.
A family budget is a set of building blocks of income and expenses, simple addition from the bottom up.
The stimulus projections are top down, a matter of economic multipliers and complex division infused with things that may or may not happen.
The government estimated how much the spending and tax cuts might grow the economy. Then that effect was translated into projected job growth overall. Then that theoretical pie was divided into chunks to show what each state and sector of the economy might get out of it.
All of this without knowing, for example, how exactly states will spend money they get from Washington. Or how money going directly to a bridge or manufacturer will support other jobs in the communities.
How much faith can we put in the sorts of assumptions that the administration used to sell its stimulus package?
_Every one-point gain in the gross domestic product will translate into 1 million jobs.
_For every two jobs directly created by the stimulus spending, a third job will be indirectly created. The 2-to-1 ratio is rough and varies considerably by sector.
_For each dollar states receive from Washington, they will decide to use 60 cents to avoid spending cuts, 30 cents to avoid tax increases and 10 cents to reduce drawdowns of their rainy day funds.
_A tax cut has only one-quarter of the value of a spending increase of the same size, in terms of expanding the economy.
_Every dollar spent on unemployment benefits is worth $1.63 of quick economic expansion. Food stamps boost the economy even more.
If one of these assumptions is off a bit, the whole model will be off a lot. Predicting the future is a shaky business, even for macroeconomists, but especially for politicians.
3 comments:
Sorry, but just do not want to resist -
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But models are never wrong! Even when they do not include obvious variables! Jim Hansen and Al Gore told me so!
“The government estimated how much the spending and tax cuts might grow the economy.
. . . . . . . . .
All of this without knowing, for example, how exactly states will spend money they get from Washington. Or how money going directly to a bridge or manufacturer will support other jobs in the communities.”
Or, as the song writer said, “You do that voo-doo that I love so well.”.
John A's examples (Hansen and Gore) are particularly apt, because economic and weather forecasting are equally [in]accurate, especially now when politics is inextricably bound to both.
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