Sunday, January 11, 2009

The proposed Obama stimulus plan

The economic team of the president elect has released a report on their proposed stimulus plan, and links to it have appeared on a number of blogs (for example, here and here). The text talks about how uncertain the estimated effects are:
It should be understood that all of the estimates presented in this memo are subject to significant margins of error. There is the obvious uncertainty that comes from modeling a hypothetical package rather than the final legislation passed by the Congress. But, there is the more fundamental uncertainty that comes with any estimate of the effects of a program. Our estimates of economic relationships and rules of thumb are derived from historical experience and so will not apply exactly in any given episode. Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity.

However, the graphs give the impression of precision. Here is a key graph from the report, which I lifted from Calculated Risk:

The report assumes that the stimulus plan will total $775 billion of tax cuts and government expenditures (both spending and transfers). The effect these have on GDP depend on the multipliers, which are estimated to total 1.55 for government spending and .98 for tax cuts (after four years). The report than translates the increased GDP into jobs:
We therefore use the relatively conservative rule of thumb that a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs, or about three-quarters of a percent.
The end result is that they project 3.625 million jobs additional jobs as a result of the program. I am not sure where their no-stimulus baseline is coming from. I scanned the report, and did not see it, but maybe it is in there somewhere.

If we enact the bill, we will get to see what the resulting unemployment series will be. If we do not enact the bill, we will see another resulting unemployment series. However, there is no way to see both series, so we can never really tell how effective or ineffective the bill will be.

I have a lot of skepticism for almost all forecasts even when I respect the forecasters.

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