White House Economic Adviser Claims Stimulus On Track To Create Or Save Over 3 Million Jobs
September 3, 2010 - 2:28 PMDeparting Chair of the White House Council of Economic Advisers, Christina Romer says there is widespread consensus that the Recovery Act has saved or created somewhere between 2 and 3 million jobs.
Romer was responding to the director of the non-partisan Congressional Budget Office (CBO) who said that determining the true effects of the Recovery Act “would require knowing what path the economy would have taken in the absence of the law.”
CNSNews.com asked Romer, “The CBO director has said that since there’s no way to know what path the economy would have taken in the absence, in the “absence” of the Recovery Act, the success of the package cannot truly be determined. Given his point, do you think that more spending will improve the economy if we don’t know the true effect of the package?”
“I think there are two things to say. What certainly Doug was saying, of course it’s hard, we don’t observe what the economy would have done without policy because we did the policy, but that’s not the same thing as saying you have no idea. There are good forecasts that people did,” she said on Wednesday at the National Press Club after her final speech as the president’s chief economic advisor.
“You can look at what people were predicting back at the time would happen, that’s where we got our forecast of what the no policy baseline was. It was looking a lot at the analysts back in December of 2008. So, it’s hard but there are ways to do it. In our reports to Congress, we described how you just do a statistical forecast.”
On August 24, CBO director Doug Elmendorf wrote on his blog, “Although CBO has examined data on output and employment during the period since ARRA’s (American Recovery and Reinvestment Act) enactment, those data are not as helpful in determining ARRA’s economic effects as might be supposed because isolating the effects would require knowing what path the economy would have taken in the absence of the law.
“You know, the important thing is that the evidence that we have about the effect of fiscal policy doesn’t just come from the Recovery Act but I feel it is incredibly strong evidence that it works – it comes from a large number of other studies, some of which I’ve done with my husband but you know there’s a long literature that shows fiscal policy absolutely matters, monetary policy matters; so I think we’re not going just on the basis of any one action. It’s a long historical record,” Romer told CNSNews.com.
“So, I absolutely feel confident that additional actions would be incredibly useful. I also want to come back to something that I said in the speech which is the, you know, that there’s widespread consensus despite what you may hear from some that the Recovery Act has saved or created somewhere between 2 and 3 million jobs already and is on track for what we said which was 3 and a half million and that’s not just us, it’s the Congressional Budget Office, which Mr. Elmendorf is the head, it’s private sector analysts from everybody from Goldman Sacs, to macroeconomic advisors to Mark Zandi and so I think it’s certainly something where there’s a widespread consensus.”
Prior to speaking with CNSNews.com, Romer admitted during her speech that her original projections, which served as the basis for the $787 billion Recovery Act, were “so far off.”
“What the Act hasn’t done is prevent unemployment from going above 8 percent, something else that Jared [Bernstein] and I projected it would do. The reason that prediction was so far off is implicit in much of what I have been saying this afternoon,” she said.
“An estimate of what the economy will look like if a policy is adopted contains two components: a forecast of what would happen in the absence of the policy, and an estimate of the effect of the policy. As I’ve described, our estimates of the impact of the Recovery Act have proven quite accurate. But we, like virtually every other forecaster, failed to anticipate just how violent the recession would be in the absence of policy, and the degree to which the usual relationship between GDP and unemployment would break down.”
When responding to Romer’s comments, Robert Barro, an economics professor at Harvard University, senior fellow of the Hoover Institution of Stanford University, and a research associate at the National Bureau of Economic Research told CNSNews.com that Romer is “pretending” there a consensus among macro-economists on government spending.
“Christie Romer has become famous for pretending that there is a consensus among macro-economists that spending multipliers are as large as assumed by the administration in its ill-fated stimulus package,” he said.
“The estimates she refers to--from large macro models of [Mark] Zandi, macro-economic advisers, Ray Fair, etc.--do come up with large multipliers (around 2 or so) but all because of the same unwarranted assumption.”
Barro elaborated on “spending multipliers” in a Wall Street Journal column about ARRA in October of 2009, saying, “These [stimulus] packages typically emphasize spending, predicated on the view that the expenditure "multipliers" are greater than one—so that gross domestic product expands by more than government spending itself.”
Based on her own research, Barro said that Romer should have “favored a stimulus package that was all on the tax side.”
“Christie's own research, with David Romer (American Economic Review, 2009), is of much higher caliber than that in the big macro models. They do find convincing evidence that cuts in taxes tend to raise GDP in the short run,” he told CNSNews.com.
“Based on this evidence, Christie should have favored a stimulus package that was all on the tax side, but politics ruled otherwise, and Christie presumably had to go along. (Perhaps two years from now, when she writes a memoir, she will confess on this point.) The main shortcoming of the Romer-Romer research is the failure to distinguish tax revenue from marginal income-tax rates. Because of this lapse, they give insufficient credit to the major cuts in marginal tax rates undertaken, for example, by Reagan in 1986 and Bush in 2003. It is this perspective--the importance of incentives embedded in marginal tax rates--that underlies the argument for retaining the Bush 2003 tax cuts.”