The View From 1776
Thursday, March 12, 2009
Bernie Madoff in the White House?
The snake oil being purveyed by the President and his budget directors is based on the same sort of wild improbabilities that Bernard Madoff used as a inducement to lure new investors (suckers).
In retrospect, even Mr. Madoff’s investors wonder how they could have been so gullible as to believe that any investment advisor could, year after year, produce 12% annual returns. But wanting to believe that there truly is a pot of gold at the end of the rainbow, they signed up and placed their bets.
In the same fraudulent way, the President and his advisors are basing a set of unattainable budget projections numbers on a never-documented, never-proved claim of Keynesian economics: the purported multiplier effect of Federal spending.
Judging by the President’s ratings in recent opinion polls, there are a lot more suckers out there who would, even now, put their money with Mr. Madoff.
As the Wall Street Journal editorializes:
After a meeting of Euroland finance ministers Monday, Luxembourg’s Jean-Claude Juncker delivered the Continent’s verdict on global stimulus. “Recent American appeals insisting that the European make an additional budgetary effort to combat the effects of the crisis were not to our liking,” he said…
While he’s in the U.K., perhaps Mr. Geithner should also ask his European counterparts whether any of them have ever seen a 1.5 Keynesian “multiplier” in the wild. That’s the idea—promoted by Mr. Summers—that every $1 of deficit spending yields $1.5 in economic growth. If that were true, Italy would be the richest country in Europe, instead of merely one of the most indebted.
And if the Treasury Secretary is looking for something to read on the plane, we recommend a recent paper by a trans-Atlantic team of four economists—two Germans and two Americans. The authors—John Cogan and John Taylor of Stanford and Tobias Cwik and Volker Wieland of Goethe University—subject the Administration’s stimulus to the most recent Keynesian scholarship.
The White House estimates of 3.6 million new jobs is based on an “Old Keynesian” model on the impact of government spending, while the new models adjust for the rational behavioral response to the stimulus by businesses and consumers. The White House figures, by economists Christina Romer and Jared Bernstein, also assume zero interest rates for a minimum of four years. The alternative assumes, more reasonably, that as growth returns interest rates will also rise.
What the four economists found is that the Administration’s estimates for stimulus growth were six times as high as they could produce under a modern Keynesian simulation. By their estimates, the stimulus would produce, at most, 600,000 jobs and add perhaps 0.6% to GDP at its peak. That’s nowhere near a multiplier of 1.5 and suggests the $800 billion would have been better devoted to business tax cuts or fixing the financial system. That’s $1.3 million in spending per job, for those keeping score at home.