Wednesday, December 1, 2010

Be wary of CBO reports on the stimulus

Without question, the Congressional Budget Office is an invaluable resource. They can produce detailed, non-partisan analysis and provide valuable economic forecasts.

But they are fallible.

For example, their reports on the stimulus leave much to be desired. They claim jobs have been created, but use projections from the original formula to come to that conclusion rather than looking at real-life data.

Peter Suderman breaks it down:
Here’s the problem: Those CBO reports don’t definitively prove anything about the real-world effect of the stimulus. That’s because in order to produce those reports, the CBO effectively re-runs the same models that it used to estimate the effects of the stimulus before it started.

The reports aren’t based on a detailed measurement of real-world output. Instead, they’re based on measuring the input (how much money was spent), and then using models to project how big the multiplier effect has been. Measuring spending and modeling output means that you can believe the CBO when it says that the stimulus turned out to be more costly than expected, but you should remain wary about any claims made using the “real-world effects” side.

Indeed, CBO director Doug Elmendorf has explicitly made this point, agreeing at a speech earlier this year that that “if the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis.”

So if in reality no jobs had been created, or only 10 jobs had been created, then the CBO’s reports would not reflect those numbers. It’s using the models that projected the stimulus would create lots of jobs to report that the stimulus did create lots of jobs.
Good to know, eh?

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