02 Sep 2010

Robert Wenzel Charmed By Christina Romer

Economics, Financial Economics 3 Comments

Ah well, we always knew RW was a pushover. He writes:

WaPo’s Dana Bank reports on the remarkable departing words of the chairman of President Obama’s Council of Economic Advisers, Christina Romer. This is a must read as this honest lady lists the failures of the Keynesian economists in the White House…

Normally I think RW is far too harsh with the poor Keynesians–especially if they worked in the government–but here he’s actually being too nice. It’s true that Romer indicts the Obama economic policies, but only if you read between the lines. (I mean, look what she had to work with.) Here’s the kind of buck-passing fluff that Romer actually delivered (HT2 Arnold Kling):

It is clear that the Recovery Act has played a large role in the turnaround in GDP and employment. In a report that Jared Bernstein and I issued during the transition, we estimated that by the end of 2010, a stimulus package like the Recovery Act would raise real GDP by about 3½ percent and employment by about 3½ million jobs, relative to what otherwise would have occurred. As the Council of Economic Advisers has documented in a series of reports to Congress, there is widespread agreement that the Act is broadly on track to meet these milestones. The nonpartisan Congressional Budget Office, CEA’s own estimates, and estimates from a range of respected private sector analysts suggest that the Act has already raised employment by approximately two to three million jobs relative to what it otherwise would have been. These estimates are also consistent with the direct job-creation reports filed by a subset of recipients of Recovery Act funds.

And how does Dr. Romer handle the touchy problem of her team’s embarrassing unemployment projections? Watch this “honest lady” go to work:

What the Act hasn’t done is prevent unemployment from going above 8 percent, something else that Jared and I projected it would do. The reason that prediction was so far off is implicit in much of what I have been saying this afternoon. An estimate of what the economy will look like if a policy is adopted contains two components: a forecast of what would happen in the absence of the policy, and an estimate of the effect of the policy. As I’ve described, our estimates of the impact of the Recovery Act have proven quite accurate. But we, like virtually every other forecaster, failed to anticipate just how violent the recession would be in the absence of policy, and the degree to which the usual relationship between GDP and unemployment would break down.

By February 2009, before the Recovery Act was passed, unemployment was already over 8 percent; and by June, before the Recovery Act could have had much of an impact, it was 9½ percent. That is, our projection turned out to be wrong even before the Recovery Act had a chance to get off the ground, which is about as clear-cut evidence as one could imagine that the problem was in our assessment of the baseline, and not in the effects of the Act.

Now, the report was very clear that there was great deal of uncertainty about the no-policy baseline, and noted that some private forecasters anticipated unemployment as high as 11 percent in the absence of action. Yet the chart we presented did not show that uncertainty, and so allowed critics to take it out of context, and falsely claim that the spike in unemployment early in 2009 is somehow evidence that the Recovery Act didn’t work. [Bold added.]

That part I’ve put in bold is absurd. Suppose for the sake of argument that having politicians borrow and spend $800 billion is a BAD idea in the middle of an awful recession. Well, in that wacky wild world, when would the harmful effects kick in? Would it be when the borrowing and spending actually started?

Or, maybe employers would alter their hiring decisions once they learned the news?

Just to drive home the point, consider a ridiculous analogy. Suppose Obama announced on September 3 that starting January 2, the US military would begin bombing randomly selected houses that did NOT have energy-efficient insulation. When would we notice a change in the housing market? When would we notice an increase in orders of new insulation? Would it be on January 2, or more like September 3?

3 Responses to “Robert Wenzel Charmed By Christina Romer”

  1. david says:

    Excellent. The big government types typically ignore expectations when it comes it fiscal policy.

  2. Bob Roddis says:

    Suppose Obama announced on September 3 that starting January 2, the US military would begin bombing randomly selected houses that did NOT have energy-efficient insulation.

    My goodness. Obama and his minions are crazy. Let’s not give them any more “ideas” for “helping” us.

  3. Austrian Spectre says:

    Bob et al,

    I was doing some “econo-surfing” recently and came across this op-ed piece at the NYT: http://www.nytimes.com/2010/07/06/opinion/06smith.html?_r=1&ref=opinion

    I would be interested in hearing your knowledge/thoughts on the piece. Is there any merit to what the authors are saying?