Ten days before President Barack Obama took office in 2009, his economic team released an analysis of a proposal to use fiscal policy to stimulate the economy to reduce unemployment. The analysis claimed that the stimulus would create 3.675 million jobs, and that as a result the unemployment rate, which otherwise might rise to nine per cent, would instead remain below eight per cent.
Such calculations appeared to be scientific and precise. However, as it turned out, fiscal stimulus was enacted in 2009, and yet the unemployment rate hit 10 per cent, which was higher than the level that the economists had predicted it would reach without the stimulus. In fact, throughout Obama’s first term, the unemployment rate was higher than the economists projected under the ‘no-stimulus’ scenario.
The economists were necessarily wrong about one or both of their claims. If they were correct in forecasting that without the stimulus unemployment would top out at nine per cent, then their analysis that the stimulus would generate less unemployment was incorrect, because the opposite happened. Conversely, if the stimulus reduced unemployment below what it otherwise would have been, then it was their baseline forecast of unemployment that was erroneous.
This post was published at David Stockmans Contra Corner on June 16, 2016.
Recent Comments