Sinclair Davidson’s bizarre stimulus argument

Sinclair Davidson, riffing off Justin Wolfers’ piece in the New York Times about the professional economic consensus that the US stimulus package of 2009 lowered unemployment, pastes a graph of the Obama administration’s unemployment forecasts with and without the stimulus and the actual unemployment time series. He then claims:

So our 36 economists [the ones who endorsed the notion that the stimulus lowered unemployment] have some explaining to do. Mainstream macro theory made a series of predictions and is summarised in that graph – reality unfolded in a very different way. So now how were they wrong in 2009 and what have they done to improve their approach since then?

This is logical nonsense, for many reasons.

The original graph comes from this report by Christie Romer and Jared Bernstein:



It was published on January 9 2009. This was before the bill was even introduced into the House and only several days after the bill was introduced into the Senate, and well before it was passed into law. It was produced before Barack Obama became President. Why is this relevant? Well, the job estimates are not for the bill that was actually passed into law on February 17 — amended by both House and Senate — but of what the authors thought Barack Obama’s proposed law might look like.

As Romer and Bernstein themselves pointed out in the report:

Our analysis will surely evolve as we and other economists work further on this topic. The results will also change as the actual package parameters are determined in cooperation with the Congress.

There are other problems with Davidson’s argument. He implies that ‘mainstream macro theory’ made a series of predictions that are ‘summarised’ in the graph. This is false. Two economists—Bernstein and Romer—made the predictions ‘summarised in the graph’. ‘Mainstream macro’ is a pretty broad term, and incorporates hundreds of different models: to talk of a singular ‘prediction’ made by some disembodied entity like ‘mainstream macro’ is very, very, deceptive. Neither Bernstein nor Romer were among the 36 economists who endorsed the stimulus-employment link. What if they thought back in 2009 that the Administration’s forecasts were too rosy? It’s not impossible, after all, Paul Krugman thought that the stimulus was going to be inadequate. Maybe some of the experts did too?

Even if the Bernstein/Romer forecasts were of the actual package passed into law, and even if every single one of the 36 economists were responsible for or endorsed those forecasts, the logic falls down. The test of whether stimulus worked is not whether the unemployment rate has followed the Bernstein/Romer forecasts, but whether it reduced unemployment relative to the counterfactual (if stimulus hadn’t been introduced.) This is obviously a much harder question to answer, and will rely on either messy econometric analysis or modelling. (We’d also need to find a way of pinpointing the effect of the stimulus from other macroeconomic developments from 2009 onwards, including contractionary fiscal policy changes from the 2010 midterms onward: another thing Davidson conveniently ignores.) Dylan Matthews wrote a good piece a while ago on the empirical evidence on the impact of the ARRA with some links to studies. The majority conclude that the stimulus worked, some don’t.

Here’s one model’s estimate of the unemployment impact of the American Recovery and Reinvestment Act (it’s Mark Zandi from Moody Analytics, graph mine)


Here’s another estimate from the CBO, this time showing what impact the stimulus had on the unemployment rate (the lower the line, the higher the stimulus effects). They calculated both ‘low’ and ‘high’ estimates of the stimulatory impact.


So no, Sinclair Davidson, there’s no reason why one graph from a report that was released about a hypothetical law should make us question fiscal stimulus. There are at least respectable arguments to say that fiscal policy doesn’t work (or doesn’t work as much as is claimed), but this ain’t it.

UPDATE: But if we do want to ask everyone how they’ve updated their priors after a bad prediction, perhaps we might be entitled to know how Mr Davidson has changed his thinking since the time he predicted an imminent threat of stagflation for the Australian economy?


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