Sunday, November 1, 2015

How the CBO gets multipliers


The CBO puts out a report on the impact of the stimulus.   They need multipliers, coefficients to estimate the impact of government spending.  Where do they get these? They ask economists to pull them out of thin  air.
CBO Report to Congress: The ranges between high and low  multipliers were chosen judgmentally to encompass most  economists’ views about the direct and indirect effects of  different policies. The multipliers indicate the cumulative impact of policies on GDP over several quarters, and they  should be understood to apply to periods when the Federal Reserve is holding short-term interest rates about as  low as possible and would not tighten monetary policy in  response to a fiscal stimulus, such as 2009. For instance, CBO estimates that a one-time increase of $1 in federal purchases of goods and services in one calendar quarter
last year would raise GDP above what it would otherwise be by a total of $1 to $2.50 over several quarters. That cumulative multiplier of $2.50 on federal purchases comprises increases in GDP of roughly $1.45 in the quarter when the spending occurs, roughly 60 cents in the following quarter, and roughly 45 cents in later quarters
 combined

The CBO is talking about this graph:
The red is stimulus spending, the blue are the number of civilian jobs.  Note the coefficients are not stable. The CBO claims the stimulus prevented further losses in 2009, but seemed to have lost its effect in 2010.  Hence there is not enough of a series to measure multipliers.  They have no way of knowing for sure.






Overall, the CO estimations are a fraud but the Kanosians will not point that out.

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