Even less precise

by Russ Roberts on November 30, 2011

in Stimulus

CBO “estimates” of the effect of stimulus on employment in the the third quarter of 2011 are even less precise than earlier ones. Stimulus spending “increased the number of people employed by between 0.4 million and 2.4 million.

That’s a six-fold range for those of you keeping score at home. Macroeconomics not the way it ought to be, but the way it is–unbelievably imprecise.

The reason the range is even bigger than past estimates is that the CBO is now using .5 for its lower bound estimate of the Keynesian multiplier, based on recent work by Valerie Ramey. (HT: Garett Jones) A multiplier of .5 means that for every dollar of government spending, there is a 50 cent reduction in spending by non-governmental sources (private consumption and investment).

I put “estimates” in quotes because of the way the CBO “estimates” these things.

Be Sociable, Share!



21 comments    Share Share    Print    Email


Jon Murphy November 30, 2011 at 1:47 pm

In the third quarter, the US economy added 373,000 jobs. So, the CBO is saying that, if the stimulus wasn’t passed, the US would have lost between 27,000 and 2.027 million jobs. That seems kind of…odd, doesn’t it?

Ryan Vann November 30, 2011 at 1:53 pm

Not if you buy the saved or created slogan.

Jon Murphy November 30, 2011 at 2:20 pm

I just ran the numbers. The CBO claims the ARRA has created between 8.5-21.5 million jobs. So, going with that assumption, without the ARRA, between 6.6 million and 19.6 million additional people would be without jobs. I have to call shinanigans on that.

Ryan Vann November 30, 2011 at 2:37 pm

That’s a lot of theoretically unemployed financial sector workers.

Greg Webb November 30, 2011 at 9:10 pm

I’m theoretically unemployed, too. Time to draw my real unemployment check.

muirge0 November 30, 2011 at 2:39 pm


From a macroeconomic aggregate perspective do you really think it’s fair to say we’ve had a stimulus when we have trimmed government payrolls by 750,000 over the last 3 years? I suspect if that number were +750,000 we’d see the economy far ahead of were it is today. Austerity is failing all over the world as best as I can tell.

Or maybe I should argue… what do you mean the stimulus has failed. Corporate profits are at record levels and the DJ is up almost 50%.

muirge0 November 30, 2011 at 6:55 pm

Or maybe I should argue… what do you mean the stimulus has failed. Corporate profits are at record levels and the DJ is up almost 50%.

And I can prove that this is not some mere coincidental correlation; it’s goddam cause and effect! Yes, sir!! The stimulus — which was meant to reduce unemployment and ensure that it never went above 8% — has, instead, fattened corporate profits; and if the big, fat, rich, corporations aren’t using those stimulus-caused profits to hire new employees and reduce unemployment, then — then — then — then –HOORAY!!!! UNEMPLOYMENT MUST BE THE FAULT OF THE CORPORATIONS AND THE PRIVATE SECTOR!!!! Heck, government did its job: it simulated and stimulated and stimulated some more! If the profit-rich, stimulated corporations aren’t reciprocating by doing their job — hiring new employees — then we the people should put the blame for unemployment squarely on them!!

I’m such a genius! I feel so good about my deep insights into the economy, I might just light up a cigarette and put it in my fancy holder! Somewhere or other, I even have a picture of myself posing with one!

Stick around. Maybe I’ll show it to you.

muirge0 November 30, 2011 at 9:00 pm

This is imposter muirgeo

muirge0 November 30, 2011 at 9:00 pm

It makes me happy to know I’ve driven you to this….

muirge0 December 1, 2011 at 7:18 am

If you’re happy, I’m happy.

Nikolai Luzhin, Eastern Promises December 1, 2011 at 2:43 am


I went and read the paper to which Russ links. It ought to be part of the climate debate it is so partisan, right, but the last paragraph brought out a little honesty.

“Increases in government spending do reduce unemployment. For all but one specification, it appears that all of the employment increase is from an increase in government
employment, not private employment. The only exception is in the specification using the Fisher-Peters measure of defense news for the 1958 to 2008 period. This specification implies that a sustained increase in government spending has a robust positive effect on private employment. On balance, though, the results suggest that direct hiring of workers by the government may be more effective than relying on multiplier effects of government purchases.”

Some other parts of the paper hi-lited but hated the massive increases in productivity of people hired by the gov’t during and post WWII.

The upshot of the paper is what I have (and I believe any sensible person would argue).

In response to the Lesser Depression, the Obama stimulus should have been much bigger, it should not have involved tax cuts, etc., it should have be directed toward maintaining state and local gov’t employment (where it is conceded that the multiplier is at least 1.5 (so much for the evil of big gov’t) and that the rest of money should have been spent on hiring large numbers of federal employees, which would have put people back to work and made them productive.

IOW Keynes was absolutely right.

Economic Freedom December 1, 2011 at 6:57 am

Hey, Nikolai!

Is it true that everyone calls you an “Archeologist” because your career lies in ruins?

Lionel from France November 30, 2011 at 2:45 pm

The multiplier is a statistical concept that has nothing to do with economics. We must stop thinking in terms of multiplier. On the one hand the multiplier varies from one individual to another, from one company to another, and secondly, it varies over time. We can not determine an average multiplier once and for all.

Henri Hein November 30, 2011 at 3:35 pm


Thanks, I completely agree. For the reasons you mention, we can no more calculate the multiplier than we can calculate the utility of a dollar.

It is worse than that. To finally determine the multiplier, you have to make this impossible calculation, then compare with the counterfactual, which is also impossible.

Mark November 30, 2011 at 2:56 pm

So, I guess there is a tipping point when enough government spending turns the multiplier above 1.

But when does too much government spending result in a multiplier back down to .5?

Or does infinite amounts of government spending lead to multiplier to Mars?

If that’s the case maybe we should take Krugman and Barnyard Franks advice an prepare for an alien invasion or better yet launch a preemptive strike on Mars.

Mark T November 30, 2011 at 5:18 pm

A multiplier below 1 is not a multiplier. It is a divisor. Suggest we rename it.

vikingvista November 30, 2011 at 11:22 pm

We did rename it, some time ago. It is now officially called “horsepuddy”. Didn’t you get the memo?

Eric Shierman December 1, 2011 at 6:55 am

If the CBO is now using a lower bound multiplier of 0.5, how could the job creation number be positive? 400k is a low number but it is much higher than the negative number that a multiplier of less than one implies.

Daniel Kuehn December 1, 2011 at 7:05 am

Explain why a multiplier of less than one implies a point in time reduction in jobs. I’m not sure I follow. It implies inefficient job creation (if that’s the multiplier we believe), but I don’t think it implies negative job creation.

John Papola December 1, 2011 at 11:16 pm

It doesn’t imply any “job creation” at all. It implies levels of nominal spending. That spending can push up prices without leading to increased output. It can push up prices that leads to increased output without net new jobs because labor market problems lead companies to increase productivity with capital investments instead of workers.

There is no equation or simulation that can account for these outcomes quantitatively.

John Papola December 1, 2011 at 9:50 pm

Not science. Not economics.

Previous post:

Next post: