Unscientific Projection of Jobs Plan Success

A couple of weeks ago, we saw Moody’s Analytics predicted that the President Obama’s proposed American Jobs Act would create 1.9 million jobs. Our immediate reactions were: (1) this estimate is probably wrong and (2) even if it is we’ll never know. Upon a bit more reflection, we still feel the same.

While precise predictions like this are often possible in the physical sciences, they are rarely feasible in the social sciences. Human behavior is complex and hard to predict. Further, it is much harder to conduct controlled experiments involving humans than with inanimate matter. While there have been some useful economic experiments, these necessarily occur at the micro (or individual/group) level rather than the macro (national) level.

Debate over whether the 2009 stimulus “worked” is thus unscientific. None of us have access to the parallel universe in which everything is the same as in our reality with the sole exception that ARRA was never enacted. We would need to measure economic variables in this universe and compare them to the analogous measures in our universe in order to really know for sure.

The mainstream way that the stimulus is estimated, by Moody’s and others, is likely to be self-fulling. It isn’t malicious, it is just macroeconomics at its worst. Last month, Harvard professor Robert Barro explained in a WSJ piece:

The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification… This multiplier is nonsense, but one has to admire the precision in the number.

In other words, the multiplier that is used to predict the outcome of a stimulus package before the spending and tax code changes is based on the same estimates that created a multiplier to plug into an equation to figure out if the stimulus worked. There is no attempt to emprically verify the assumptions so the forecast and the outcome are the guaranteed to be aligned.

In the absence of hard evidence, we are left with conjecture. We could call the stimulus a failure because it didn’t result in rapid economic growth. We could say it succeeded because its passage coincided with the end of the 2007-2009 economic nosedive. We might even take the two preceding facts to conclude that the 2009 stimulus was not big enough, and use this reasoning to justify a further stimulus. While this logic might be correct, we cannot know with any certainty.

Of course, to say something “worked” is also to suggest that there is a uniform definition of success. It is simple enough for critics of the president to define success as anything beyond actual results, and for the administration to simply count the results as its intended goal. Since success is always somewhat murkily and abstractly defined when most policies are outlined, then you can define success however you want in retrospect and say something “worked.” Did the president say his jobs plan would lower unemployment to a specific target? Did he predict an exact jump in GDP? He’s got economists at OMB and the Council of Economic Advisors giving him numbers, but it is much easier to keep those in house and leave “success” as a definition to be post dated.

Looking back at history we can find some (admittedly inconclusive) evidence to suggest that further fiscal stimulus is not required to recharge economic growth. In 1993—shortly after the end of a recession—President Clinton and a Democratic Congress passed a package of tax increases and spending cuts to reduce the deficit. From a contemporary Keynesian point of view, this would seem like the wrong policy, yet its enactment was followed by a sustained period of economic growth. In 1982, President Reagan signed the Tax Equity and Fiscal Responsibility Act (TEFRA), significantly raising taxes at a time when unemployment exceeded 10 percent. Once again, this instance of contractionary fiscal policy was followed by a period of significant economic growth.

The bottom line is that we can’t say for sure whether the jobs plan will work or whether it’s necessary. We do know that it is likely to increase deficits now, and we can’t be sure that future Administrations and Congresses will allow offsetting savings to occur. If there is not a quick return to “full employment” levels, we have to wonder whether additional stimulus measures will be put forward and whether we will have to wait even longer until Washington finally comes to grips with its long-term fiscal imbalance.