CBO's Rosy Stimulus Numbers Have Little Basis in Reality, But Media Again Report Them as Fact

In the media's continued effort to sell the stimulus to the American public, reality is simply a nuisance. It's much easier to use rosy economic projections with little to no grounding in the real world, and to refrain from informing readers just how disconnected from reality those models are.

That is exactly what many in the media have done since the Congressional Budget Office released numbers yesterday (pdf) claiming that the stimulus has, in the words of ABCNews.com reporter Andy Sullivan, "put millions of people to work and boosted national output by hundreds of billions of dollars in the second quarter."

The only problem with this reasoning: it has no basis in reality. Those employment and economic growth numbers exist only on paper. The models may tell economists and policymakers that a certain number of jobs have been created, but that number has literally no connection to the actual unemployment situation.

Of course that hasn't stopped the media from reporting CBO's numbers as fact before. And once again, they've demonstrated their own disconnect from reality.

There are two essential problems with CBO's findings: first, they assume what they purport to demonstrate. CBO accepts as given that each dollar in stimulus spent will create X number of jobs and Y points of economic growth. The logic looks like this: the stimulus creates jobs, therefore the stimulus created jobs.

Second, the CBO's analysis, by its own admission, did not take into account what could have happened without the stimulus. So it is entirely possible that the economy could have created more jobs and economic growth without the legislation.

The latter point is simple economic logic, but it is also reinforced by scholarship. A recent study at Harvard Business School found that the more money federal legislators sent back to their home states or districts, the more private businesses in those areas retrenched. Private sector economic activity actually decreased as more pork left Washington.

Ed Morrissey wrote of the study's findings:

If this seems counterintuitive, it might be from marinating too long in Beltway conventional wisdom. When private entities (citizens or businesses) retain capital, it gets used in a more rational manner, mainly because the entity has competitive incentives to use capital wisely and efficiently. The private entity also has his own interests in mind, and can act quickly to use the capital to its best application. Private entities innovate and look to create and expand markets, creating more growth.

Since the stimulus is just a massive pork barrel project, it stands to reason that it could adversely affect economic activity even where it is most heavily targeted. Could that actually be the case? Well, according to the CBO report released yesterday,

Although CBO has examined data on output and employment during the period since ARRA's 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.

In other words, the report did not examine what the economy might have looked like absent the stimulus package. Considering the media's fondness for touting jobs saved - a completely hypothetical claim - one would imagine they would at least ponder the possibility of a stimulus-less economy.

Of course even CBO's measurements concerning stimulus spending were a tired exercise in theoretical economics. It was the same methodology the CBO has been using since the stimulus passed, and - surprise! - it produced nearly identical results.

Reason's Peter Suderman reported in March:

...In response to a question at a speech earlier this month, CBO director Doug Elmendorf laid out the CBO's methodology pretty clearly, describing the his office's frequent, legally-required stimulus reports as "repeating the same exercises we [aleady] did rather than an independent check on it." CBO tweaks its models on the input side, he says-adjusting, for example, how much money the government has spent. But the results the CBO reports-like the job creation figures-are simply a function of the inputs it records, not real-world counts.

Following up, the questioner asks for clarification: "If the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis, right?" Elmendorf's response? "That's right. That's right."

Even if it were acceptable to use models to gauge economic growth without actually examining the economy, we now know that the stimulus was a failure even by the most basic standards of federal spending aimed at promoting economic growth.

Former White House economic advisor Lawrence Lindsey claims he was cited as a supporter of a generic stimulus package before the measure was actually passed. But even Lindsey, who supported the idea of a stimulus package in the abstract, wrote earlier this month that "the bill that was actually passed into law was both so expensive and so badly flawed that it gives the whole concept of macroeconomic stimulus a bad name."

Since the projections in CBO's models are based on previous experience with economic stimulus packages - as is, presumably, Lindsey's support for a theoretical stimulus - assuming that those models apply neatly to today's economic situation is misguided at best.

Despite all of these facts, many in the media have trumpeted the CBO's findings as irrefutable signs that the stimulus saved the American economy from even greater catastrophe. The Washington Post, the Associated Press, Bloomberg, and ABC News are four outlets that reported CBO's findings without mentioning that its numbers were based on economic models that were not derived from actual economic conditions, and do not take into account the failures of the actual bill to do what its supporters claimed it would.

The CBO was forced to do something similar during the health care debate, when Democratic congressional leaders were scrambling to keep the bill's price tag below a trillion dollars. Even if CBO knows its forecasts or predictions are beyond the pale of reality, they must score what Congress gives them.

The CBO does not presume to know what would have happened had the stimulus package not been passed at all. Research suggests that the economy could even have been better with no federal spending at all. This possibility also escaped mention by these reporters.

It's getting continually more difficult to tout the successes of the stimulus by using real-world examples. The media, apparently, have devised a solution: ignore reality.