The Failure of Obama's Economic Forecasters

In January of this year, Christina Romer (now Chairman of the President's Council of Economic Advisors) and Jared Bernstein (now Chief Economist and Economic Policy Adviser to Vice President Joseph Biden) put together a report, The Job Impact of the American Recovery and Reinvestment Plan, for the then incoming Obama Administration. They detailed what would happen to the economy with a "stimulus" package and what would occur without a package. The chart below is in the report (Click on chart for a larger view):



With the stimulus package, they projected unemployment peeking at just under 8%. Without a stimulus package, they projected unemployment peeking at 9%. Today, despite the stimulus package, unemployment stands at 9.8%. How did Romer and Bernstein get is so wrong? It is instructive to read their full report.

They expected not only a gain in employment beginning in Q4 2009 (Which appears very unlikely at this point), but remarkably they expected the gain to come to a significant degree from the construction industry and manufacturing. They write:

The estimates suggest that 30% of the jobs created will be in construction and manufacturing, even though these industries employ only 15% of all workers.

There is not one mention of the business cycle or monetary theory. Their work is based, as they tell us on:

Our estimates of economic relationships and rules of thumb are derived from historical experience and so will not apply exactly in any given episode.

Bottom line, they are trend followers and extrapolators. And since, they have no theory to apply, no wonder they are so off. One simple sentence could have saved them from embarrassment, "Provided the Federal Reserve maintains its current accomodative monetary creation at an annualized rate of 15%." (Which was the rate Bernanke was pumping money at in January)Indeed, if Bernanke had continued money growth at that rate, the Fed's favorite economic distortions would have developed all over again, and the Romer-Bernstein forecasts would have probably been too pessimistic. on employment (I hasten to add that I am aware of the inflationary consequences of Bernanke's continued money printing, but am only dealing here with the employment impact, since that is the topic of the Romer-Bernstein report.)

But, they did not issue such a caution, although they hedged their report in all kinds of general ways. Aside from extrapolations without theory, they also entered Keynesian Wonderland with discussions of government spending, without any discussion of where the money is to come from to do this spending. If it comes from borrowing, it ignores that an equal amount of money is crowded out of the private sector. If the money is simply printed, then it ignores the misdirection of resources that is caused by the newly printed money that is out bidding those who have not received the new money.

Presumably, Romer-Bernstein are ruling out tax increases as a source of revenue, since they do discuss tax cuts. But, one can not really be sure, since they simply do not discuss at all in any way where the money is going to come from to support the "stimulus" program.

In short, the current Chairman of the CEA and the economic adviser to the vice president put an economic employment report together, a few short months ago, that ignores monetary theory, adopts tracking and extrapolations methods that are impossible to use in a complex economy.

They then assume a stimulus package without discussing the sources for said stimulus. This isn't a case of an emperor without clothes. This is a case of clothing the emperor with new non-existent clothes.