Stimulus success stories should be treated with scepticism

One frequently hears statements that the stimulus package led to a lower level of unemployment or that it contributed to a higher level of GDP growth than would have occurred had no stimulus package been introduced. The notion is that as bad as our economic circumstances are already, economic conditions would have been even worse had there been no stimulus.

 

Such statements cannot, however, be substantiated by those who devise such policies. Since it is the same Keynesian model that has been the basis for the stimulus package that is also the basis for the modelling undertaken to provide the counterfactual, all that has been shown is the model predicts that any policy based on its own structural design will be successful.

 

The actual world of events has not unfolded in two modes, one with a stimulus package, the other without. We do not know in any realistic way what would have occurred had the stimulus package not been introduced, or what would have occurred had some other set of economic policies been applied.

 

An important instance of such wrong forecasting is found in the United States. The Innocent Bystanders blog has been comparing the actual unemployment rate with the projections made by the Obama “economic team”. These are shown in the chart below.

The pale line shows the unemployment projections made by the Obama administration if no stimulus plan were introduced. The darker line shows the projected unemployment rate after the introduction of the stimulus plan. The set of dots shows the actual unemployment rate in the United States. What is clear is that the unemployment rate not only has not fallen, but is well above the rate projected to occur even had there been no stimulus at all.

 

Two conclusions may be drawn. Firstly, such projections are merely the results of a set of models built according to the economic concepts of those who write the programs. In this instance, they are Keynesian models. They therefore cannot be used to test the validity of their own basic structure if the core question is whether that structure is valid in the first place. 

 

The second point is the more important. The Obama Administration indicated in advance the positive effects its stimulus package would provide. The stimulus has shown itself not to have worked, at least so far as its original projections are concerned. The Obama Administration has since stated conditions had actually been worse than originally thought, but that is only an after-the-fact rationale.

 

It is just as plausible to argue the stimulus has not only not worked but has made conditions worse than they would have been had no stimulus been applied. For those who argued the stimulus would actually cause harm, this is a confirming experience, while those who think the situation should have improved must now find explanations for this obvious failure in forecasting.

Indeed – just look at the assumptions of this BBC article! http://news.bbc.co.uk/1/hi/business/8331497.stm

Indeed – just look at the assumptions of this BBC article! http://news.bbc.co.uk/1/hi/business/8331497.stm

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