Buried within the Congressional Budget Office's most recent report on the progress of President Obama's American Recovery and Reinvestment Act was a surprising admission: the CBO now estimates the stimulus might have been only half as effective as previously thought.
You wouldn't know it from the headlines. "Stimulus added up to 3.3M jobs," reads a representative piece from Politico reporting on the November CBO report. This headline is accurate for the high-end estimate. That estimate, however, is essentially unchanged from previous reports. In the past, the CBO's low estimate for jobs "created or saved" was 1.2 million which, in this report, has dropped to only 600,000.
A particularly unusual requirement in the stimulus was that the CBO issue regular reports on its estimates of the legislation's economic effectiveness. Standard neo-Keynesian macroeconomics, to which the CBO has long seemed to subscribe in its economic modeling, posits that government spending creates a "multiplier effect" that ripples throughout the economy and creates more growth than it would normally appear to. The CBO's newest report cuts one of their estimates in half, validating conservative criticism that they've been overestimating the effect of the stimulus.
If the debate about the law was shaped by the possibility that a $825 billion spending law would yield only six hundred thousand jobs, the debate may have been a lot different. Over $1.3 million dollars per job "created or saved?" That's not a number that Democrats are eager to be touting on Capitol Hill.
The Center on Budget and Policy Priorities put together a chart representing the CBO's revised estimates:
It might be difficult to find those who would argue that the stimulus was worth it if the CBO's new low-end estimate of jobs "created or saved" is accurate. The left will always have Paul Krugman and similar ideologically-aligned colleagues arguing that the CBO is wrong, that the economic multipliers are higher, and that the CBO is actually underestimating the growth that comes from a massive injection of government money into the economy. The problem for Krugman et. al is that the economics on such undertakings are far from settled.
Studies attempting to estimate the effects of countercyclical fiscal policy have found an incredibly wide range of possibilities. While the CBO estimates a multiplier effect between 0.5 and 2.5, academic literature is even further apart. IMF economists writing about recent studies found estimates that government spending could be either significantly harmful or even more effective than the most optimistic CBO scenario. In summing up the state of macroeconomics, they found this to be an "embarrassingly wide range of estimated multipliers."
"Usually, the CBO is very careful when they apply the range of jobs created because they don't really know for sure," said Douglas Holtz-Eakin, former CBO director and president of the American Action Forum. "I think it says a lot about the confidence of the profession in their ability to provide these estimates. There's simply no consensus about the size of multiplier effects in the best of circumstances, and for those that were introduced in the midst of a large financial crisis-induced recession, it's even more uncertain."
The CBO's modeling represents the wide range and uncertainty surrounding the economic community. It's also not simply a matter of splitting the difference between the best-case and worst-case scenario being represented. The range presented is so wide precisely because economists are genuinely unsure of their methods and projections. New York Times economics reporter Ed Glaeser discussed this in writing,
The fundamental problem with acquiring certainty about Keynesian intervention is that anti-recessionary spending is just not very amenable to clean, compelling empirical evaluation… And so we are left wading in ignorance. It is a great tragedy that the most important area of economic decision-making is also the area where we will always know the least.
Economics was famously coined as "the dismal science" – and while the CBO is a nonpartisan, trustworthy institution, its estimates nonetheless represent value judgments and certain assumptions. Their willingness to revisit those assumptions in the wake of a stimulus that has not followed the models for what was promised by the Obama Administration is admirable. "They should be applauded for going back and reviewing on the basis of new research and new evidence," Holtz-Eakin said.
Neither party has a monopoly on economics, despite what Obama's economists may have claimed during the stimulus debate, and what the president himself regularly implies. Republicans who argue that the stimulus had no effect at all on employment are likely just as wrong as the news media that takes the CBO's high-end estimates as fact. It's difficult to spend that much money and have absolutely no effect on employment, no matter how strong a crowd-out effect might occur. The important thing is that the CBO effectively admitted their critics were correct that they have been overly optimistic in their economic estimates of the stimulus. Conservatives should applaud.