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Ineffective Stimulus? Why Not Double Down!! July 1, 2009

Posted by geoff in News.
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Over the past 3 months we have found that:

  1. The Obama economic team’s peak unemployment predictions were unrealistically optimistic,
  2. Their estimate of the speed of relief by Stimulus spending was also unrealistically optimistic, and
  3. Their actual “economic modeling” apparently consisted of spreadsheet-level estimates of unemployment

But it’s unfair to blame the entirety of the enthusiasm for spending $787 billion on them – they had support from the private sector as well. And the most influential supporter was probably Mark Zandi, the Chief Economist of Moody’s Economy.

Don’t know him? Well, this bit from the Washington Post will serve as an intro:

It’s an open question whether the stimulus bill can lift the nation’s ailing economy. But this much is certain: It’s a bonanza for the career of Mark Zandi.

The 49-year-old economist is a Democratic dream, a former adviser to GOP presidential candidate John McCain who advocates spending over tax cuts as the best way to deliver a quick jolt. The founder of Moody’s Economy.com now asserts that even if it reaches $900 billion, the current package may be too small. His PowerPoint presentations are a staple at congressional hearings. In floor speeches and news conferences, Democratic lawmakers confer on Zandi an authority once bestowed on Alan Greenspan, the former Federal Reserve chairman.

That’s Mark Zandi. Now this fellow also made some economic projections, and I presume that they were based on a more sophisticated analysis than the meager efforts of Obama’s team. So let’s have a look at what he predicted on January 21, 2009, back when the stimulus package was weighing in at $825 billion. And just for fun, let’s compare that to what actually has been happening:
Zandi-vs.-Reality-June-Proj
From this we can see that while Zandi was much less optimistic than Obama’s team, his projections of job creation were just as flawed. In fact, if you give him a break and assume that his starting point should have been the end of Q109, the Q209 data is following the same curve as the “w/o Stimulus” prediction.

In fairness, 3 weeks later Zandi revised his prediction, claiming that the reduction of the spending bill by 5% would reduce job creation by 33% (at the Q410 point). I don’t know why his model has such an extreme sensitivity, but it still doesn’t explain why his model is tracking the “w/o stimulus” unemployment rate rise.

So why does this matter
? Because now Zandi is calling for a second round of Stimulus spending:

Policymakers should thus be quietly preparing another round of fiscal stimulus for early 2010. Effective additional stimulus might include more help to state and local governments, whose budget problems will probably be even worse next year; an expanded housing tax credit to address the foreclosure crisis; and a payroll tax holiday.

Go get ’em, Mark. Maybe you can run your model on this new stimulus package so we can see some more imaginary jobs being created.

Comments»

1. Edward Von Bear - July 1, 2009

Zandi advised McCain? That should disqualify him right there from any future discussion without prejudice

2. Vmaximus - July 1, 2009

We. Are. So. Screwed.

3. Dapandico - July 1, 2009

Another Al Goracle powerpoint ranger. His power point presentations are not open to debate.

4. reason - July 1, 2009

“payroll tax holiday”

Careful, there, fella. You’re getting dangerously close to an actual tax cut… Flirting with the devil!

5. Herr Morgenholz - July 1, 2009

Thank God the triangles are here. They’ll know what to do.

6. Joey Buzz - July 1, 2009

Team 44 has stated that one should “never let a crisis go to waste” My question is; If the crisis gets worse do their responses follow suit?

7. CCPhysicist - July 2, 2009

I believe, as I documented last month,

http://doctorpion.blogspot.com/2009/06/inflection-point.html

that their error was that they interpreted a downward fluctuation in new jobless claims in December as a real indicator that the slope of the unemployment curve was going to start to turn over in January.

If you “correct” their curve, bending it upward so the “no stimulus” line hits the actual Q1 value and also has a positive curvature at that point, it would be a better comparison. An even better one would be to shift the point where the two curves diverge into Q2, which reflects the reality that the stimulus package was not passed on January 21 and the further reality that most of it did not get budgeted, let alone spent, by the states until Q3 (that is, starting now).

I do, however, agree with you on the second stimulus – up to a point. There is a real danger of overheating the economy during recovery by putting too many people back to work. We need to see what is happening. The economy is not a nimble sports car, it is a loaded semi with a 6 month delay in the steering input. However, there is also a risk that an ADDITIONAL 10% of the people in our state would become unemployed if the economy does not recover by next year when the second year of stimulus money runs out. That is what budget projections indicate if the stimulus expires before business picks up again.

8. July Unemployment « Innocent Bystanders - August 7, 2009

[…] Mark Zandi (Moody’s Economy.com) kind of agreed with the Obama team’s projection back in January. But his predictions weren’t much better. […]

9. An Accurate Unemployment Projection « Innocent Bystanders - January 8, 2010

[…] There was an earlier post about Zandi’s predictions, and it included this caveat: In fairness, 3 weeks later Zandi […]


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