August 24, 2010

Stimulating Statistics

Today, the econometric whiz kids at the nonpartisan Congressional Budget Office released the results of a study on the financial stimulus – known in formal Washington parlance as the American Recovery and Reinvestment Act (ARRA). Their findings are quite enlightening.

Primarily, the CBO established that the stimulus boosted American Gross Domestic Product (GDP) by 1.7 percent to 4.5 percent. Per Reuters:
CBO's latest estimate indicates that the stimulus effort, which remains a political hot potato ahead of the November congressional elections, may have prevented the sluggish U.S. economy from contracting between April and June.

The CBO report [pdf] also posits that between 1.4 million and 3.3 million jobs were added due to the stimulus. That translates to an unemployment rate 0.7 to 1.8 percentage points less than it would have otherwise been.

Unfortunately, as Ben Page of the CBO’s Macroeconomic Analysis Division notes on the Director’s Blog:
The effects of ARRA on output and employment are expected to gradually diminish during the second half of 2010 and beyond. The effects of ARRA on employment and unemployment are expected to lag slightly behind the effects on output; they are expected to wane gradually in 2011 and beyond.

Your servant here at LGB sees this as a good rationale for further stimulus. Nobel laureate Paul Krugman, the New York Times columnist and Princeton economist, thinks further stimulus would be a grand idea. (He also argued that the original stimulus was too small.)

While concerns about inflation and interest rates are valid, data make it increasingly clear that taxpayers are seeing a return on investment. The stimulus – as meager as some found it, and as dangerously irresponsible as others thought it to be – has boosted the economy and kept unemployment from rising still further. Imagine what even more investment in stimulus could have generated. (This writer wonders if tepid early investors in Microsoft ask themselves the same question today.)

True, as Mr. Page makes clear, forecasting such alternate scenarios is difficult. But at the very least, this appears to be a short-term victory for John Maynard Keynes and the economic thinking he promulgated which has, of late, been too often critiqued by conservative pundits, politicians and economists.

Ahead of voting in November, the challenge of trying to market the ARRA as a good idea remains. How can you easily convey what might have been? That is a tough question. Democrats -- including New Hampshire's would-be U.S. Senator Paul Hodes -- need to figure that out soon if they hope to keep their own jobs.

ADDENDUM: For readers who wish to review the CBO study for themselves, but who have neither the time nor patience for the wonkish full-blown report, you may find the aforementioned CBO Director's Blog a welcome tool. Mr. Page's summary is both well written and informative.

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