Wonk It Out
Yesterday the Obama transition team delivered an official estimate of the effects of their recovery package, as it stands now, focusing particularly on job creation. Obama spoke about it in his weekly address.
I asked my nominee for Chair of the Council of Economic Advisers, Dr. Christina Romer, and the Vice President-Elect’s Chief Economic Adviser, Dr. Jared Bernstein, to conduct a rigorous analysis of this plan and come up with projections of how many jobs it will create – and what kind of jobs they will be. Today, I am releasing a report of their findings so that the American people can see exactly what this plan will mean for their families, their communities, and our economy.
The report confirms that our plan will likely save or create three to four million jobs. 90 percent of these jobs will be created in the private sector – the remaining 10 percent are mainly public sector jobs we save, like the teachers, police officers, firefighters and others who provide vital services in our communities.
The jobs we create will be in businesses large and small across a wide range of industries. And they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long-term.
(The insistence that the jobs be in the private sector doesn't make much sense to me. Who cares where the paycheck is coming from? This is an example of how Obama still accepts too many of the arguments of prevailing conservative economic ideology, which I'll return to in a moment.)
What's quite remarkable about the analysis is that it's honest. It very specifically states that tax cuts will not be nearly as effective in creating jobs as direct government investment. It includes state government relief as a necessary component of saving and creating jobs (state relief provides the biggest job-creation number). It admits that there's a wide margin of error in terms of numbers of jobs across specific sectors, particularly because of the unusual nature of this recession. And the numbers it eventually uses are basically correct, says Paul Krugman.
Kudos, by the way, to the administration-in-waiting for providing this — it will be a joy to argue policy with an administration that provides comprehensible, honest reports, not case studies in how to lie with statistics.
That said, the report is written in such a way as to make it hard to figure out exactly what’s in the plan. This also makes it hard to evaluate the reasonableness of the assumed multipliers. But here’s the thing: the estimates appear to be very close to what I’ve been getting.
The report does make is hard to determine what's in the plan, but that's because they're assuming a sort of mythical, as-yet-unwritten plan that has elements of what we've heard through news reports. Seeing that Krugman has been a critic of the proposal for being not sufficient for what is needed, however, we do see a pattern emerging: the Obama team is diligent, scrupulous, technocratic and aware of the challenge - they just aren't willing to do what's necessary.
So this looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.
One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am.
Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak.
This is a far cry from the Bush era, where they would hide the evidence, lie about the statistics, and reach unreasonable conclusions. However, while the reliance on the facts makes the end result far easier to recognize, it does not make it any more palatable. This is a weak package.
There's a more generous reading of these numbers by Tim Fernholz, who thinks that the chart showing unemployment still well over 7%, even with the recovery plan, by the midterm elections is meant for a particular audience:
But even with this plan, you can see that unemployment will remain appreciably high through the 2010 election, which could be problematic for Democrats in congress even if it seems that the economy is moving in the right direction. The new administration's expectation is that every percentage point increase in GDP is equal to about 1 million jobs, and they project a 3.7 percent increase in GDP and 3.6 million new jobs by the end of 2010 [...]
But one thing I do expect is for Democratic members of congress to look at that graph above, consider their reelection prospects, and wonder if maybe they ought to make the bill just a bit bigger so that unemployment line will drop just a bit lower as voters head to the polls; nothing like seeing self-interest and good public policy go hand-in-hand.
That's very possible. And as Fernholz notes, the effects of limiting foreclosures and recapitalizing banks with the second half of a rejiggered bailout could also be positive for economic growth. So in a sense, we're viewing this recovery package in a vacuum.
But the central problem remains. Obama's team has a sense of the problem, knows what's needed for the solution - and is reluctant to do all that is necessary. At the end of Krugman's The Return of Depression Economics and the Crisis of 2008, he basically says (can't find the quote right now) that the only thing holding back a real response to the crisis is ideology - the accumulated economic thought of the last several decades that is based on old paradigms and the belief that depressions can never happen again, that the tools have been put in place to eliminate the possibility of bank runs and extended pain. The events of the past year have shown that this isn't true, and depression economics must again be used to get us out of the wreck. And so, despite Obama's frequent calls for post-partisanship and his focus on "what works," the problem with his outlook is structurally ideological. He prefers incrementalism and cautiousness over real solutions because he cannot comprehend using the instruments of depression economics at this time. I do think Obama has shown the capacity to listen and alter his thinking based on the facts. But until he bridges this ideological divide, when he can accept a real Keynesian solution, or nationalization of the banks, we are going to be struggling with insufficient, incremental responses.