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Meaningless Multipliers Sank the Recovery Act, Part 1

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Keynesian economists never have to "find" the jobs created; they simply make them up with multipliers.

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Editor's Note: This is the first in a two part series.

The Congressional Budget Office released its most recent estimates of the effectiveness of the Recovery Act. In the trailing 12 months, the midpoint of its numbers claims that 7 million jobs have been created by Recovery Act spending compared to Bureau of Labor Statistics reports showing 711,000 jobs lost over that period.



Initially projected to create 3.6 million jobs by December 2010, the American Recovery & Reinvestment Act (ARRA) has been a failure by most measures. Flawed or failed legislation is, of course, not out of the ordinary. What is extraordinary about ARRA is the confusion over its results. Keynesian economics, based on a 70-year-old concept of stimulus, is largely to blame.

Considering recent legislation to fill state budget gaps in education, it's critical for Congress to understand that the March 2009 ARRA did exactly that, and there remains hundreds of billions of dollars in unspent recovery funds. That's many times the size of the $26 billion "jobs bill" just signed into law to protect teacher salaries at the expense of future food stamp programs. It must be understood that the "government purchases" section of the ARRA was almost entirely a bailout of public employee salaries at the state level. If "saving" these jobs was stimulus last year, and "saving" them again this year is stimulus, then every dime ever spent by the government is stimulus.

The most important things to understand about the Recovery Act:

1. Instead of achieving its stated goal of 90% private-sector job creation, ARRA did the exact opposite. More than 95% of any jobs created have been in the government sector (fully outlined on Recovery.gov and confirmed by the Congressional Budget Office).

The original document outlining job creation estimates is no longer available on whitehouse.gov. It was replaced with an "updated" document three pages shorter and without the industry-specific job targets originally outlined. Christina Romer, the now-departed head of the Council of Economic Advisors, wrote the original report based on the private-market analysis done by Mark Zandi of Moody's. Like most economists, neither of these two have experience with spending multipliers, unlike Harvard's Robert Barro, whose research suggests their multipliers are at least 100% too high.

2. It failed because of Keynesian multipliers. ARRA architects used basic algebra to predict a larger job creation effect from 2009/2010 fiscal stimulus than comparable spending achieved in the industrial buildup to World War II.

Keynesian fiscal stimulus is intended to provide temporary government stimulus when unemployment rises and the economy is perceived to be performing below its potential output. Keynesians not only assume they can spend money wisely enough to put people back to work, but they presume to know what the "proper" unemployment rate is. None of their models take into account whether recent high employment levels were dependant upon the past two decades' reliance on falling interest rates, unsustainable lending tools (subprime mortgages, home-equity cash-outs, and securitization of nearly everything), and the resulting "bubble-level" economic activity they enabled. Instead of letting the economy adjust to a lower "new normal" level of employment and GDP growth, Keynesians see a drop in employment and think they can "press a button" to boost GDP and employment. Keynesians don't dig into what makes up GDP. They just see a downturn and assume there's an "output gap" that needs to be rectified by government spending on anything.

I used the term "press a button" above because that's the favored phrase of one of America's most vocal promoters of Keynesian fiscal stimulus, Paul Krugman. In a Newsweek article a year ago, the Nobel Prize winner described his love of economics as "the beauty of pushing a button to solve problems. Sometimes there really are simple solutions: You really can have a grand idea." Inquiring minds might wonder what sort of hubris it takes to think that a $14 trillion economy and a $787 billion stimulus plan can be boiled down to "pushing a button." The hastily constructed American Recovery & Reinvestment Act has been a failure because Keynesian economics enables this kind of simplistic thinking. They never have to "find" the jobs created; they simply make them up with multipliers.

Please click here for Part 2 of this article.


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