Economists rule the world! Politicians genuflect before them. Whether it is the economists in the Congressional Budget Office, the Office of Management and Budget or those who build an economic argument for political ideas, at the end of the day their assumptions will forecast the future and those forecasts will determine where your tax money goes.
All of the 10-year budget agreements that are celebrated in press releases and reported on the news are based on economic assumptions. What will the interest rate be? What will the economic growth rate be? What will revenue projections be? What will the unemployment rate be? What will inflation be? They, and many more, are plugged into a computer model and the result will be exactly as accurate as a 10-year weather report, which is to say, not accurate at all.
Economic predictions are plugged into a computer model & are as accurate as a 10-year weather report
Economic forecasts are convenient tools for policy-makers to game the system. The trillion dollar stimulus program that was passed in the first weeks of the new Obama administration in 2009 was entirely propped up by economic forecasts showing that without it, unemployment would reach 8 percent and by now be just at 5 percent. We spent the trillion dollars. Unemployment went over 10 percent and is still above 7 percent. The economists missed that one.
Another was the “Cash for Clunkers” program. It was forecast that providing federal dollars to buy old cars would boost the auto industry, reduce pollution and, with better mileage, reduce oil prices.
The program did not “create” any new purchases; it just rearranged the purchasing schedule of the buyers. People moved up their purchases to take advantage of “free” government money, but over the following 12 month period there was no measurable benefit other than increasing the revenues to the car crushers who crushed 690,000 cars and the landfill owners who now harbor 345 million pounds of residue.
Three billion dollars later we increased the average mileage 0.6 miles per gallon. Since only 0.2 percent of all cars were replaced the impact on pollution couldn’t be measured. The increase in government spending further decreased the value of the dollar causing oil prices to increase. They missed that one too.
Cash for Clunkers was followed by Dollars for Dishwashers. Same economic forecasts. Same results.
All of this comes to mind because of an appearance on “Face the Nation” last Sunday by Senate Majority Leader, Harry Reid. Desperate to extend unemployment benefits he referred to a study by economist Mark Zandi which forecast that a one-dollar increase in spending on unemployment benefits increases economic growth by $1.64.
Here we go again. House Minority Leader, Nancy Pelosi, weighed in with the “well known fact” that unemployment benefits grow the economy and create jobs.
There are about 11 million unemployed today. Why don’t we double their unemployment checks and create a booming economy? Unfortunately no one would be available to take the new jobs since they will all be busy spending their unemployment benefit just to keep the economy roaring along.
And Mrs. Pelosi gave us another way to Nirvana. She said that increasing food stamps is the best way to grow the economy. The same economic study by Mark Zandi forecast that every dollar spent on food stamps creates an economic benefit to the economy of $1.73.
That simplifies things. There are about 47 million people on food stamps today costing about $80 billion per year. Why don’t we just double the benefit and increase the cost to $160 billion? On the strength of that forecast we will grow the economy by about $300 billion, which will, of course, create more jobs and, thus, more tax revenue and thus…well, you can fill in your version of Nirvana here.
I was first confronted with the wonders of economic forecasting as a member of the Georgia legislature in 1975. We faced a significant spending cut in order to meet the constitutional requirement of a balanced budget.
A lady from Atlanta rose and informed us of a well-known economic axiom which assured us that every dollar spent by the government created an economic benefit that returned three dollars in tax revenue. Well, I said, why don’t we just borrow about a trillion or so, spend it and sit back and wait for the three trillion to come in to pay off all of our debt and replenish our rainy day fund for a few hundred years. She was unmoved by my confidence in her prediction and my motion died for lack of interest. Another forecast bit the dust.
Which brings me, rather neatly I think, to Linder’s Law #8: “If all of the economists in the world were laid end-to-end … it would be a good idea.”
John Linder can be contacted at: firstname.lastname@example.org or on Twitter @linderje.
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