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Sunday, September 25, 2011

Not More of the Same Model Simulations!

Simulations of Mark Zandi’s economic model, which are reported in the press to show that a new temporary stimulus package will create 1.9 million jobs, are being touted as evidence that it will work. This is the same type of model simulation that predicted the very similar 2009 stimulus package would create millions of jobs, and the same type of simulation that claimed that that package worked. Andrew Ferguson reviews the predictions in a recent article in Commentary.

But simulations of such models do not provide such evidence, as I have explained on this blog before, for example here and here. They are wrong because they assume “multipliers” for temporary one-time payments or tax changes far in excess of the basic “permanent income” or “life cycle” models (which we teach in Economics 1). They are wrong because they assume that state and local government infrastructure and other purchases respond to federal stimulus grants in a mechanical way, unlike what we have seen practice, as I explained in this article with John Cogan. And they are wrong because they do not take account of the negative growth effects of expected future permanent increases in tax rates. I have debated Mark Zandi on these topics many times before, for example on the NewsHour and in congressional testimony.

However, the terribly weak economic recovery has forced an important change in the way that these predictions are put forward by modelers like Zandi. They have to admit that even their exaggerated estimated impacts of the temporary stimulus packages are, yes, temporary. Macroeconomic Advisers reports the same thing: “the GDP and employment effects are expected to be temporary” and more specifically that “these proposals will pull forward increases in GDP and employment, not permanently raise their level.”

In other words, even if, on balance, jobs are created by the package (which is doubtful), they will be destroyed as soon as the temporary package is over, according to Zandi. Thus even the promoters of such temporary packages agree that they will not jump-start the recovery, which is what is needed to really reduce unemployment.

Perhaps more than anything else, this is the reason why we need to do something besides “more of the same,” and instead follow the wisdom put forth in this speech (video, transcript)  by George Shultz upon winning the first Economic Club of New York Award for Leadership Excellence this past week.