Federal spending not crowding out private sector
WASHINGTON (MarketWatch) -- The $800 billion federal stimulus bill has boosted employment by 1 million to 2.1 million and helped the economy grow about 1.5% to 3.5% larger than it would have without the stimulus, the nonpartisan Congressional Budget Office said Tuesday.
Those estimates are in line with the CBO's previous estimates, and those of other economists who've looked at the economic impact of the American Recovery and Reinvestment Act, which was passed about one year ago.
There were few surprises in the CBO analysis, which was based largely on general equilibrium models of the economy that use economic theory and historical data to estimate how the economy would perform under different scenarios. Read the full report on the CBO website.
WSJ's Lee Hawkins and Grainne McCarthy discuss today's markets decline in the wake of data showing a drop in consumer confidence. Plus, WSJ's Joe White and MarketWatch's David Weidner detail the latest from the hearings on the Toyota recalls.
What's new in the latest CBO report is an attempt to push back at critics who have argued against the stimulus from a number of theoretical vantage points.
In a special appendix, the CBO answered those critics and justified its own approach.
The critics say: The most basic argument against the stimulus is the fact that the economy did worse than expected. As of January 2008, unemployment was forecast to hit 8% by the end of 2008 if the stimulus were approved. However, the jobless rate hit 10.2%. Ergo, the stimulus failed. This argument is often voiced by congressional Republicans, including House Republican Leader John Boehner.
The CBO replies: "Data on actual output and employment during the period since ARRA's enactment are not as helpful in determining ARRA's economic effects as might be supposed, because isolating the effects would require knowing what path the economy would have taken in the absence of the law." We cannot know for certain what path the economy would have taken without the stimulus.
The worse-than-expected growth in 2009 "reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects" of the stimulus, said CBO Director Douglas Elmendorf.
The critics say: Government spending cannot, in principle, stimulate growth in the economy. one dollar of government spending will merely replace - or crowd out - one dollar of private-sector spending. The stimulus leaves the economy right where it was, except with a higher government debt.
In these skeptics' view, individuals and companies realize that they will ultimately have to pay for any government spending now through higher taxes later. So they save the money now to pay the taxes later. This argument has been advanced by academics and pundits, such as Eugene Fama and John Cochrane of the University of Chicago.
The CBO replies: The theory that government spending will crowd out private spending is based on "unrealistic" assumptions. "This type of model generally assumes that people are fully rational and forward-looking, based their current decisions on a full lifetime plan." These models assume that people "have full access to credit markets" to maintain their desired level of lifetime consumption, even if they lose their job temporarily. These theories also assume that involuntary unemployment is impossible.
None of those assumptions are realistic. If the government were crowding out the private-sector, interest rates would rise to reflect less private investment in the future. Interest rates aren't rising, CBO said.
No comments:
Post a Comment