Obama's fatal conceit (2)

I just finished browsing the paper written by Obama's economic advisors (Christina Romer and Jared Bernstein) to justify his $800 billion stimulus plan. My first thought was that they wrote the conclusion to the paper first (i.e., spending all this money on a combination of tax cuts, rebates, and government spending programs will produce the desire effect of saving or creating at least 3 million jobs), then backed into the the details necessary to justify the conclusion. My second thought was that as with all economic forecasts, the most critical variables are the assumptions one uses. As a former colleague of mine (Michael Bazdarich) who is proficient in econometric forecasting models always used to say, "tell me your assumptions and I'll tell you your conclusions."

As Greg Mankiw notes, it is remarkable (and, I would add, most troubling) that one of the most critical assumptions they make runs directly opposite to the results of Christina Romer's own research. Namely, they assume that the multiplier effect of tax cuts is only 0.99. Romer's prior research suggested that tax multipliers were in the range of 3 (i.e., one dollar of tax cuts yields three dollars of GDP). They justify the numbers they use because they are the average of the ones used by "a leading private forecasting firm and the Federal Reserve’s FRB/US model."

If they had used Romer's own tax multiplier, the stimulus package would have had to include a far larger share of tax cuts than the one being proposed, since she found that tax cuts are a far more effective source of stimulus than spending. But since that doesn't fit with Obama's current preference for making tax cuts about 40% of the overall package, they presumably chose multipliers that justified the desired conclusion, and those were not hard to find or to justify. That the package includes tax cuts at all (since they are assumed to be much less effective than government spending), is solely because they acknowledge that tax cuts can be put into effect much faster than spending, and fast-acting stimulus is judged to be important. To think that this is the way modern day technocrats work to support politicians who believe that rearranging over 5% of our $15 trillion economy will make us all better off!

My hope at this point is that Obama's proposal generates a storm of discussion and disagreement. It is so huge in scope, so difficult to implement, so fraught with complexity, and so swollen rich with money that the political and lobbyist vultures are already circling. Perhaps someone will question the critical assumptions behind the plan. Others will argue whether spending money on A is be better than on B. Perhaps the public will begin to comprehend the massive potential for corruption and waste that lurks beneath the surface of these plans, and react with horror as it did with HillaryCare. And maybe enough people will raise their hands and point out that taking money from one person and giving it to another is hardly likely to make a quick and lasting improvement in overall living standards. If the plan can be delayed long enough, we may discover that in the end it's not really necessary.