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Meaningless Multipliers Sank the Recovery Act, Part 2


Keynesian multipliers allow economists to ignore reality by making up jobs that can't be found on actual payrolls.

Editor's Note: This is Part 2 of two-part series. Click here to read Part I.

Zero Job Creation, A Local Example

San Francisco's "Presidio Parkway" project has been in the planning stages for nearly 15 years, and is a very worthy infrastructure investment. The funding was expected to be largely at the state and local level, with some federal help. The gap was to be filled with additional tolls and local taxes. Once the American Recovery and Reinvestment Act (ARRA) was implemented, $100 million was allocated to help pay for the Presidio Parkway. No change in the project. No change in jobs. Yet that $100 million is still multiplied by a Keynesian multiplier (1.5-2.5 depending on which Keynesian is doing the math), to estimate the boost it gave GDP. From that incremental GDP, a fantasy job "created or saved" is backed out of the figure.

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The most direct reason for the failure of the ARRA was the overly optimistic algebra in its predictions. In order to estimate the job impact of proposed fiscal stimulus, economists multiply government spending by a certain number to extrapolate GDP, and then from there attempt to predict jobs. In the original document predicting ARRA jobs, President Obama's economics advisor Christina Romer used a multiplier of about 1.57. The Congressional Budget Office used a multiplier of about 2 in its estimate of 2 million jobs created in the fourth quarter of 2009. Harvard Professor Robert Barro estimates that the actual multiplier for World War II stimulus spending was .8, so he uses a lower estimate for ARRA spending of .6. Romer assumed that filling state budget gaps in education and transportation would have doubled the stimulus affect of the industrial buildup around World War II!

Writing in the Wall Street Journal on February 23, Barro highlighted Romer's lack of qualification in estimating fiscal stimulus multipliers, namely that her experience has been in tax multipliers, not spending multipliers.

"I have not seen serious scientific research by Ms. Romer on spending multipliers, so I cannot understand her rationale for assuming values well above one, as she has apparently done when evaluating the fiscal stimulus plan."

I contacted stimulus architect Mark Zandi at Moody's to ask him if, in hindsight, were his multipliers too high. His response:

"[T]he script is still being written. We need more data and the data we do have will be almost certainly revised. My sense is, based on the data we do have, is that the multipliers will end up being close to what I estimated."

And that's the problem. While the "script" is being written, politicians aren't waiting for the ink to dry before claiming job-creation numbers that are completely removed from facts on the ground. Keynesian multipliers enable this.

The issue of misleading accounting and the problem with Keynesian multipliers with ARRA first came to light in October 2009 when presented the first estimates of jobs "created or saved" by the bill. Errant reporting was rampant, with one of the more egregious examples being stimulus jobs reported in nonexistent Congressional districts.

Responding to criticism, Office of Management & Budget Director Peter Orszag drafted a memo on December 18, 2009, explaining that the new definition of a job retained was "an existing position that is now funded by the Recovery Act."

From that point on, any notion of being able to classify a job "created or saved" by ARRA became meaningless, and Republican Congressman Darell Issa hit the roof. He sent a letter to the board in charge of, and demanded they clarify "SAVED/CREATED," now that a memo had just been circulated saying that existing jobs could be counted as "CREATED or SAVED" when they had been neither. Issa then brought Earl Devaney -- the man in charge of overseeing compliance with ARRA reporting -- in front of Congress to ask him about Issa specifically asked if it would be more honest for to say "we don't know how many jobs have been created or if recipients are reporting correctly," instead of "jobs funded under the recovery act." Devaney, the man most closely associated with the job-creation figures, said "I would agree with that statement." shows that in just the fourth quarter 2009, almost every single job was "created" in the government sector. The Congressional Budget Office concurs, pointing out that education alone created "two-thirds" of the jobs. In fact, more education jobs were created in the fourth quarter of 2009 than Romer expected to be created during the entire length of the ARRA.

One reason for the shock to Romer's original expectations was an increase in productivity. Her algebra incorrectly assumed a certain level of stimulus would create a certain level of GDP growth, dutifully followed by a certain increase in employment. GDP ended up not creating the expected number of jobs that Keynesian multipliers thought it would, due to an increase in worker productivity that shattered "Okun's Law," a 50-year-old concept used by economists to predict employment levels based on GDP.

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Our elected leaders could follow the example of American families who tighten their belts in times of economic stress. Rather than spending billions to save public employee jobs, Congress could follow the lead of San Francisco mayor Gavin Newsom, who implemented a 6% pay cut for city employees that in turn saved their jobs.

Keynesian multipliers allow economists to ignore reality by making up jobs that can't be found on actual payrolls. This religious-like devotion to their cause allows them to demand more billions spent on failed policies like the Recovery Act. If the concept of Keynesian fiscal stimulus can survive the meaningless job-creation math of the ARRA, then I do believe it can survive anything!

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