Ask Unemployed How the Stimulus is Working

[JohnSmith2007 353]

Ask Unemployed How the Stimulus is Working

By Diana Furchtgott-Roth

WASHINGTON - How well is the stimulus working? This week saw disappointing data in durable goods orders and housing, prompting some economists to predict a double dip recession.

Yet on Tuesday the nonpartisan Congressional Budget Office issued a report showing that the American Recovery and Reinvestment Act of 2009 increased the number of people employed by between 1.4 and 3.3 million people in the second quarter of 2010 and lowered unemployment by 0.7 to 1.8 percentage points.

CBO concludes that without the Recovery Act unemployment, which stood at 9.5% in July, might exceed 10% and possibly be above 11%.

There's just one problem. CBO's latest figures are inconsistent with its claims of the effects of the stimulus bill when it was passed in February 2009. If its models failed to accurately predict the effects of the stimulus bill then, why should we believe the models now?

This is important because some are taking the CBO report as proof that the stimulus bill is working and so we need...more stimulus. (Although, if the stimulus worked, why do we need more?) Vice President Joe Biden declared on Tuesday, "We have to keep moving forward and build on measures like the Recovery Act that are creating jobs and making us competitive in the 21st century economy."

In contrast, in another speech on Tuesday, in Cleveland, House Republican Leader John Boehner called for Congress not to allow taxes to rise in 2011 and to cut government spending.

After passage of the stimulus bill, in a March 2009 letter to Iowa Senator Chuck Grassley, CBO predicted that the unemployment rate in the last quarter of 2009 would rise to 9% without the stimulus package, from its then-current level of 8.2%. With the stimulus, CBO said, the unemployment rate would range from 7.8% to 8.5%. The actual rate in December, 11 months after enactment of the stimulus, was 10%, far higher than CBO said it would be absent the stimulus.

CBO predicted that in the fourth quarter of 2010 the unemployment rate would be 8.7% without the stimulus, and between 6.8% and 8.1% with the stimulus package. We haven't reached the fourth quarter of 2010 yet, but it doesn't look as if our 9.5% unemployment rate will decline to even the baseline of 8.7% in the next few months, let alone to 8.1% or 6.8%.

One major flaw in the CBO models is the expectation of full employment over the next decade. Unbelievable as though it may sound, in March 2009 CBO wrote, "The effect on employment is never estimated to be negative, despite lower GDP in later years, because CBO expects that the U.S. labor market will be at nearly full employment in the long run." Try telling that to the 14.5 million unemployed.

Rather, employers' willingness to hire varies dramatically depending on the costs of employment. The readiness of Americans to look for work is influenced by the ease of finding jobs, as well as by after-tax income, which is affected by tax rates. The increases in taxation and borrowing, both present and future, required to fund the deficit can have negative effects on employment.

When the stimulus package was enacted in February 2009, the labor force participation rate, the percentage of Americans who say they are working or looking for work, stood at 65.6%. Last month it was 64.6%, a full percentage point lower. After some fluctuations, over a million Americans have withdrawn from the labor force since April 2010.

The Democrats' agenda -- government stimulus programs, trillion-dollar annual deficits over the next decade, new costs on employers for health care, and the prospect of tax hikes in January -- has not succeeded in lowering the unemployment rate from its February 2009 level of 8.2%, a level that looks positively rosy today.

If Americans had known in February of 2009 that the $787 billion stimulus package (whose cost CBO later raised to $862 billion) would not lead to declines in unemployment, but instead a substantial increase in the unemployment rate to 9.5%, opposition to the spending would have been practically universal.

Put it another way - if Americans were asked now whether they would prefer today to have back the February 2009 unemployment rate of 8.2% and the $862 billion spent on stimulus, they would say yes.

Some say things would have been worse if the stimulus funds had not been spent. They assume that more government spending, including the $862 billion stimulus, must be good for the economy. This form of Keynesian economics fell out of fashion decades ago everywhere, except in the halls of power in Washington.

If more government spending always helped the economy, why stop at $862 billion? Why not give each American an unlimited bank account? Then the unemployment rate would likely rise to 100%. But some economists would still offer unverifiable models to "prove" the benefit to the American public.

Bad economics does not make good government, and, as the economic data show, America is wallowing in bad economics.

Unemployed Americans know that they are worse off than before the stimulus package was passed, despite rosy estimates from CBO. It's time to try a different tack - lower taxes and spending - and budget numbers that are based on reality.

Diana Furchtgott-Roth is a contributing editor of RealClearMarkets, an adjunct fellow at the Manhattan Institute, and a columnist for the Examiner.

http://www.realclearmarkets.com/articles/2010/08/26/cbo_the_cover-up_budget_office_98641.html

[SMR 368]

Ask Unemployed How the Stimulus is Working

By Diana Furchtgott-Roth

WASHINGTON - How well is the stimulus working? This week saw disappointing data in durable goods orders and housing, prompting some economists to predict a double dip recession.

Yet on Tuesday the nonpartisan Congressional Budget Office issued a report showing that the American Recovery and Reinvestment Act of 2009 increased the number of people employed by between 1.4 and 3.3 million people in the second quarter of 2010 and lowered unemployment by 0.7 to 1.8 percentage points.

CBO concludes that without the Recovery Act unemployment, which stood at 9.5% in July, might exceed 10% and possibly be above 11%.

There's just one problem. CBO's latest figures are inconsistent with its claims of the effects of the stimulus bill when it was passed in February 2009. If its models failed to accurately predict the effects of the stimulus bill then, why should we believe the models now?

This is important because some are taking the CBO report as proof that the stimulus bill is working and so we need...more stimulus. (Although, if the stimulus worked, why do we need more?) Vice President Joe Biden declared on Tuesday, "We have to keep moving forward and build on measures like the Recovery Act that are creating jobs and making us competitive in the 21st century economy."

In contrast, in another speech on Tuesday, in Cleveland, House Republican Leader John Boehner called for Congress not to allow taxes to rise in 2011 and to cut government spending.

After passage of the stimulus bill, in a March 2009 letter to Iowa Senator Chuck Grassley, CBO predicted that the unemployment rate in the last quarter of 2009 would rise to 9% without the stimulus package, from its then-current level of 8.2%. With the stimulus, CBO said, the unemployment rate would range from 7.8% to 8.5%. The actual rate in December, 11 months after enactment of the stimulus, was 10%, far higher than CBO said it would be absent the stimulus.

CBO predicted that in the fourth quarter of 2010 the unemployment rate would be 8.7% without the stimulus, and between 6.8% and 8.1% with the stimulus package. We haven't reached the fourth quarter of 2010 yet, but it doesn't look as if our 9.5% unemployment rate will decline to even the baseline of 8.7% in the next few months, let alone to 8.1% or 6.8%.

One major flaw in the CBO models is the expectation of full employment over the next decade. Unbelievable as though it may sound, in March 2009 CBO wrote, "The effect on employment is never estimated to be negative, despite lower GDP in later years, because CBO expects that the U.S. labor market will be at nearly full employment in the long run." Try telling that to the 14.5 million unemployed.

Rather, employers' willingness to hire varies dramatically depending on the costs of employment. The readiness of Americans to look for work is influenced by the ease of finding jobs, as well as by after-tax income, which is affected by tax rates. The increases in taxation and borrowing, both present and future, required to fund the deficit can have negative effects on employment.

When the stimulus package was enacted in February 2009, the labor force participation rate, the percentage of Americans who say they are working or looking for work, stood at 65.6%. Last month it was 64.6%, a full percentage point lower. After some fluctuations, over a million Americans have withdrawn from the labor force since April 2010.

The Democrats' agenda -- government stimulus programs, trillion-dollar annual deficits over the next decade, new costs on employers for health care, and the prospect of tax hikes in January -- has not succeeded in lowering the unemployment rate from its February 2009 level of 8.2%, a level that looks positively rosy today.

If Americans had known in February of 2009 that the $787 billion stimulus package (whose cost CBO later raised to $862 billion) would not lead to declines in unemployment, but instead a substantial increase in the unemployment rate to 9.5%, opposition to the spending would have been practically universal.

Put it another way - if Americans were asked now whether they would prefer today to have back the February 2009 unemployment rate of 8.2% and the $862 billion spent on stimulus, they would say yes.

Some say things would have been worse if the stimulus funds had not been spent. They assume that more government spending, including the $862 billion stimulus, must be good for the economy. This form of Keynesian economics fell out of fashion decades ago everywhere, except in the halls of power in Washington.

If more government spending always helped the economy, why stop at $862 billion? Why not give each American an unlimited bank account? Then the unemployment rate would likely rise to 100%. But some economists would still offer unverifiable models to "prove" the benefit to the American public.

Bad economics does not make good government, and, as the economic data show, America is wallowing in bad economics.

Unemployed Americans know that they are worse off than before the stimulus package was passed, despite rosy estimates from CBO. It's time to try a different tack - lower taxes and spending - and budget numbers that are based on reality.

Diana Furchtgott-Roth is a contributing editor of RealClearMarkets, an adjunct fellow at the Manhattan Institute, and a columnist for the Examiner.

http://www.realclearmarkets.com/articles/2010/08/26/cbo_the_cover-up_budget_office_98641.html

Bottom line is that the experts in Washington are just not smart enough to fix this thing. They can't even figure out what's going on. But we're supposed to trust them.

[Mr. Big Dog 10,747]

Bottom line is that the experts in Washington are just not smart enough to fix this thing. They can't even figure out what's going on.

And that makes them different from the Wall Street analysts how? It's not like they haven't corrected their initial unemployment predictions downards as it became clear that this wasn't just another recession but the worst recession since WWII.

Edited August 26, 2010 by Mr. Big Dog

[SMR 368]

And that makes them different from the Wall Street analysts how? It's not like they haven't corrected their initial unemployment predictions downards as it became clear that this wasn't just another recession but the worst recession since WWII.

You say this as if you think that I trust Wall Street analysts or think they know what they are doing. I was making the point that the "experts" in Washington are incompetent. Defending them by attacking Wall Street analysts is a logical fallacy.

[Mr. Big Dog 10,747]

You say this as if you think that I trust Wall Street analysts or think they know what they are doing. I was making the point that the "experts" in Washington are incompetent. Defending them by attacking Wall Street analysts is a logical fallacy.

You missed the point.

[Usui Takumi 1,562]

Well it visibly did 3 things.

1. Road repairs in our area where finally completed. I imagine this was the case across the country.

2. It propped up housing for a year. Obviously we'll have to wait and see if it was sustainable...probably not after this weeks numbers but we need a few more months to tell.

3. It propped up the auto industry which seems to have been sustainable.

[SMR 368]

You missed the point.

No, the point is that there aren't any experts anywhere smart enough to engineer a recovery by cleverly spending in certain areas to achieve a calculated effect. The government is blindly spending money and Obama is asking us to trust him, in spite of the fact that clearly neither he, nor his "experts" understand what is going on. That is the central dishonesty of this stimulus.

Wall Street analysts are completely peripheral because in spite of their greed or incompetence, they can only take money from me if I give it to them. The government practices extortion and thus I am forced to pay for government ignorance.

You are trying to deflect the blame by pointing out that other analysts were incorrect and it wasn't only the ones in Washington. That, is a logical fallacy. Just because someone else is wrong, too, doesn't make the experts in Washington right.

The reality is, either these "experts" and the politicians they advise understand the economy and can be trusted to make decisions that drastically affect the economy as whole or they don't. This proves they don't. Why do you trust them?

[Mr. Big Dog 10,747]

No, the point is that there aren't any experts anywhere smart enough to engineer a recovery by cleverly spending in certain areas to achieve a calculated effect.

You're still missing the point. From across the pond where Germany demonstrates that Keynesian policies work - even if the money isn't necessarily spent "cleverly".

By law, recipients of public investments under the second economic stimulus program must be permanent. But according to a previously unpublished report by the German Federal Audit Office, this requirement is often not met. The auditors at the Bonn-based agency identified many measures for which long-term use is questionable at best.

For instance, they wonder whether it truly makes sense to spend €222,000 on the renovation of a cultural center in a neighborhood with only 300 residents. And they question whether it is reasonable to invest in firehouses in regions that have seen population decline for years.

In some cases, local governments are spending stimulus funds to fulfill costly wishes. A government-owned stud farm in the southwestern town of Marbach, which includes a breeding facility for Arabians, is being renovated to the tune of €7.5 million. Schöningen, a town in the northern state of Lower Saxony, has plans to build a €15 million interactive museum for old hunting weapons. The Hamburg zoo is using €7.5 million in government subsidies to build an Arctic Sea habitat that will initially house polar bears, common murres and other animals.

According to the Federal Audit Office report, in 9 percent of projects "the subsidization criteria were not adhered to" or "it was not possible to achieve the goals associated with them." The auditors are particularly troubled by the fact that the money from Berlin is being used to fund so many small projects. They report that about a third of all projects cost less than €50,000, and that about 2 percent come in at less than €5,000. Projects like a wall-mounted diaper table for a kindergarten, historical wall charts and the construction of a sandbox are not suited "to achieving the economic goals of the Future Investments Act," the Bonn auditors conclude. In addition, they argue, such "very small projects" are "consumptive in nature."

Perhaps they are right, but during the crisis, it was more important to provide companies with orders. No one is more aware of this than Jörg Meseck, who owns an engineering firm in the eastern state of Brandenburg. When the economy declined, Meseck lost about €13 million in orders. Just as he was contemplating having to let some of his employees go, he started receiving new orders funded by the government's second stimulus program.

[BobandXiaomei 14]

You're still missing the point. From across the pond where Germany demonstrates that Keynesian policies work - even if the money isn't necessarily spent "cleverly".

But there are critics of Keynesian multiplier: "Opponents of Keynesianism have sometimes argued that Keynesian multiplier calculations are misleading; for example, according to the theory of rational expectations, it is impossible to calculate the effect of deficit-financed government spending on demand without specifying how people expect the deficit to be paid off in the future."

The massive deficet could be overwhelming the premise.