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White House’s stimulus math doesn’t add up


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Washington Examiner:

White House’s stimulus math doesn’t add up
By: MATTHEW SHEFFIELD
Washington Examiner
08/11/10 2:40 PM EDT

Responding to criticism that massive federal spending has not managed to hold unemployment below the 8 percent that they promised, White House officials are saying that those numbers from January 2009 were inaccurate because they did not take into account how weakened that the economy actually was.

Instead of letting that response be a rhetorical get-out-of-jail-free card, conservative economist Lawrence Lindsey has decided to take the administration at its word and adjust the numbers generated by its economists Christina Romer and Jared Bernstein to fit the actual economic data.

Lindsey’s findings are detailed in a piece he wrote for our sister publication the Weekly Standard accompanied with the graph below:

I am sympathetic to their argument and Chart 1 corrects for their complaint by raising their estimate of where unemployment started in their experiment. The lowest line provides the original estimate of the path of unemployment provided by Romer and Bernstein on January 9, 2009. The second line replicates the Romer and Bernstein path, but raises the initial unemployment rate from their assumed 7.5 percent to 8.2 percent. This was the actual average of the unemployment rate in the first quarter of 2009, the period in which the stimulus was passed. The third line provides a more extreme alternative by raising the initial unemployment rate to the 9.3 percent average of the second quarter 2009. The first modification fully compensates for their objection while the second modification more than compensates for their concern.

But as the chart shows, the problem with the stimulus wasn’t just the starting point—it was that the stimulus itself has been ineffective at lowering it. Chart 1 shows that the actual unemployment rate, given by the solid line, is not only above the original Romer-Bernstein projections, but also above projections that take account of the “starting point” problem. Actual unemployment has been consistently above all of the projections, regardless of starting point, because the stimulus bill has basically brought no relief in terms of lower unemployment.

Chart 2 shows the Romer-Bernstein projections of what would have happened if the stimulus had not passed, but as in Chart 1, those projections were shifted up to reflect a higher starting unemployment rate. The striking observation is that after correcting for the higher starting point, the actual performance of the economy is almost exactly what Romer and Bernstein said would happen if we had done nothing, rather than passing the $800 billion package.snip
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