Heritage senior tax policy analyst Curtis Dubay and macroeconomics policy analyst Karen Campbell have a new paper out analyzing The Job Impact of the American Recovery and Reinvestment Plan put out by Council of Economic Advisers president and vice president Christina Romer and Jared Bernstein. Dubay and Campbell write:
Romer and Bernstein estimate how much government spending and tax cuts will increase production, or gross domestic product (GDP). … Romer and Bernstein, however, rely on a model based on historical data that is not comparable to current economic conditions, because an increase in government spending as large as this one has never been tried as a stimulus before. Rather than take the time to estimate a more accurate multiplier, Romer and Bernstein use one estimated for much lower levels of spending and assume it applies to the massive spending program under analysis.
They then apply the spending multiplier to the proposed total spending in the stimulus package. They ignore the fact that the stimulus package contains spending on a variety of items–everything from money for the National Endowment for the Arts and new sod for national monuments to infrastructure spending. Romer and Bernstein, therefore, assume that all spending affects the economy equally.
A better back-of-the-envelope calculation would at least consider estimated multipliers from a range of different models and assumptions. Many economists have used a variety of methods and assumptions to estimate the size of multipliers for government spending and found them to be lower than those used by Romer and Bernstein.
Romer and Bernstein even admitted as much, burying this admission deep in their report:
It should be understood that all of the estimates presented in this memo are subject to significant margins of error…. Our estimates of economic relationships and rules of thumb are derived from historical experience and so will not apply exactly in any given episode. Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity.
Dubay and Campbell conclude:
The Obama Administration and Members of Congress are relying on a flawed report as evidence of the effectiveness of the stimulus plan. The report should not be trusted. It is based on faulty assumptions that even the authors admit create significant margins of error. More rigorous research has shown that tax rate cuts will create millions of jobs and cost less than the Obama plan.Taxpayers deserve better information before their money is spent on things that will not offer the return they were promised.