Married to the model

Lest you think I exaggerated how little the mainstream economists are aware of the increasingly tenuous link between their Neo-Keynesian economic model and the way the economy actually operates in RGD:

The Congressional Budget Office (CBO) has produced a new report estimating that the $862 billion stimulus has thus far saved or created 1.5 million jobs. Yet the CBO’s calculations are not based on actually observing the economy’s recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs — thus guaranteeing their result.

Logicians call this the begging-the-question fallacy. Mathematicians call it assuming what you are trying to prove. The CBO model started by automatically assuming that government spending increases GDP by pre-set multipliers, such as:

* Every $1 of government spending that directly purchases goods and services ultimately raises the GDP by $1.75;

* Every $1 of government spending sent to state and local governments for infrastructure ultimately raises GDP by $1.75;

* Every $1 of government spending sent to state and local governments for non-infrastructure spending ultimately raises GDP by $1.25; and

* Every $1 of government spending sent to an individual as a transfer payment ultimately raises GDP by $1.45.

Then CBO plugged the stimulus provisions into the multipliers above, came up with a total increase in gross domestic product (GDP) of 2.6 percent, and then converted that added GDP into 1.5 million jobs.

The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP by the multipliers above, its conclusion that the stimulus saved jobs was pre-ordained. The economy could have lost 10 million jobs and the model still would have said that without the stimulus it would have lost 11.5 million jobs.

The present state of economics is very, very bad. The fact that mainstream economists not only can’t recognize that the economy is in a depression, probably a Great Depression, but think it’s in the midst of a genuine recovery is powerful evidence that their theories and models need to be completely junked.