Steven Rattner writes in the Financial Times (HT: Shekhar Patil):
However compelling the merits of long-term deficit reduction, the Keynesian notion of counter-cyclical fiscal policy remains valid. As economists Alan Blinder and Mark Zandi (a former adviser to Republican John McCain) found, the first Obama stimulus saved about 8.5m jobs and may have prevented a depression.
Really? That’s what they found? He treats it like a discovery of fact. As in “Blinder and Zandi weren’t sure of the distance between the earth and the sun but when they measured it, they found it was about 93,000,000 miles.” That isn’t the way econometrics works. (Here is what I said when the Blinder Zandi study first came out.)
Now Mr Zandi calculates the new Obama plan would create 1.9m jobs in the next year and add two percentage points to gross domestic product. The Republican alternative – slamming on the brakes – would have the opposite result.
Calculates? As in the square root of 144? Or a harder one–the square root of 150. Need those decimal points. As in 1.9m million. Gives it an air of precision, doesn’t it? See my comments above.
It is always difficult to prove counterfactuals, such as the meltdown that would have occurred had Washington stayed on the sidelines when the crisis hit in 2008, as all the Republican challengers now argue – to varying degrees – should have happened. But we need not turn the economy into a laboratory. Economics is enough of a science for us to know that immediate harsh deficit reduction, with tightened monetary policy, would surely plunge us back into recession.
Alas, economics is not enough of a science to know that.