The Effects Of Fiscal Stimulus: A Magical Analysis

September 7, 2009

by Mario Rizzo  

At the outset of the Obama Administration, as Greg Mankiw reminds us, their economists laid out a series of predictions about where the unemployment rate would be with the stimulus package and without it. Currently, the economy is doing worse than their predictions of unemployment without the stimulus and, of course, much worse than the predictions with stimulus.   

You wouldn’t know this from the statements being made by Obama, Romer, Summers, et al. All of those statements focus on the second derivative: the unemployment rate is growing less quickly than before. 

Now it is a “well-known” constant of economics that, in the absence of fiscal stimulus, the rate of increase in unemployment never falls. The big debate among economists is whether that rate remains constant or increases — in the absence of stimulus.  

Now it is quite impossible for the rate of increase itself to increase without limit. So I guess the law must be: In the absence of stimulus the rate of increase will remain constant until no one is employed. Or perhaps until the Great Depression’s famous unemployment rate of 25 percent is reached.  

Clearly, I speak nonsense.  

The stimulus apologists are ignoring the original prediction based on a model. By that prediction the stimulus is doing harm.  

Instead, they are choosing the easier route of the time honored “principle” post hoc ergo propter hoc. They attribute to the stimulus the current state of affairs — but not anything regarding the current state of affairs, just anything that can be construed as better than something else that could have happened. (Since that is always possible, there are no Nobel prizes here.)  

So, in the last analysis, politics makes fools of the “scientists.”

14 Responses to “The Effects Of Fiscal Stimulus: A Magical Analysis”

  1. Lee Kelly Says:

    Mario wrote: “You wouldn’t know this from the statements being made by Obama, Romer, Summers, et al. All of those statements focus on the second derivative: the unemployment rate is growing less quickly than before.”

    If every trillion dollars of stimulus reduces the rate at which unemployment grows by half, then there is only one way to eliminate further increases in unemployement — an infinite stimulus.

    Can I be an economic advisor to the Obama administration yet?

  2. Ike Pigott Says:

    If you prescribe three leeches to a hemophiliac, and he gets worse, the answer is not to assume that nine leeches would have cured him.

  3. Michael Smith Says:

    The economists in the Obama administration cannot be so stupid as to fail to realize they are “cherry picking” which effects to attribute to the stimulus. The only possible explanation is that they think WE are so stupid, they can get away with it.

  4. Mike Rulle Says:

    Just because you are paranoid, does not mean someone is not out to get you. Just because their predictions failed, does not mean they are not correct.

    I too am joking, although correct. It may have been Mario who said something along the following lines in an earlier post—”people like Summers and many economists with brilliant backgrounds, still, despite the lack of meaningful evidence, seem obsessed with believing stimulus spending “works”.

    Sometimes I think Macroeconomics is an accounting identity masquerading as a prescriptive tool.


  5. [...] a ThinkMarkets post yesterday, NYU's Mario Rizzo blew up the Obama administration's arguments that the stimulus is [...]

  6. saifedean Says:

    Ike,

    You are right. Nine leeches are not the answer. He needs 30 leeches.

    As for stimulus as predictions, I think Professor Rizzo is being unreasonably harsh. As The Maestro Greenspan taught: just because our last 14 quarterly predictions were wrong, does not mean that the next one will be wrong.

  7. Bob D Says:

    There should be a peer group of economists that is able to strip the credentials or bring charges of malfeasance against members who knowingly deviate from accepted principles to satisfy their political paymasters. This is done in the Medical and Legal fields and although difficult to apply to Economics, it might keep the transgressors from making false statements due to the threat of exposure and their reputation being hurt! Maybe the institution that granted their degree could strip the certification of repeat offenders.


  8. [...] again FEE lecturer Mario Rizzo of NYU and ThinkMarkets cuts through the balderdash about how well the “stimulus” is [...]

  9. Mario Rizzo Says:

    While I haven’t investigated this particular case in detail, one can usually find some model or tweak thereof that would give you the hypothetical stimulus effect you want. However, the scientifically honest thing is to choose a model at the outset and stick with it. They chose one and now they seemed to have dumped it.

  10. Tom Nally Says:

    Since the government has no money of its own, all money used as “stimulus” has to be extracted from the private sector. Unfortunately, it takes the federal government $1.00 to procure the same amount of goods and services that can be procurred in the private sector for $0.75.

    This twenty-five-cent loss of purchasing power out of each and every dollar, when multiplied billions and billions of times over, represents millions of jobs that will never come into existence.

    Therefore, this alleged “stimulus” will destroy both wealth and jobs in the net. No other outcome is even possible.

    —Tom Nally, New Orleans


  11. [...] 30, 2009 The first from John Stossel.  In it, he links to and quotes from a blog post from Mario Rizzo.  One interesting quote regarding the stimulus [...]


  12. [...] take from Mario Rizzo: At the outset of the Obama Administration, as Greg Mankiw reminds us, their economists laid out a [...]

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