Sunday, August 8, 2010

It's Not Bragging If You Can Back It Up With Estimations

"How does the CEA arrive at these numbers? It uses two methods, Romer said. The first is a standard macroeconomic forecasting model that estimates the multiplier effect of fiscal policy. (The government's spending is someone else's income.) The second method is statistical, using previous relationships between GDP and employment to project future behavior. "

In other words, every time you hear an estimate of how much the stimulus impacted the economy, what you are hearing is an estimate based on assumptions.  They assume that spending X results in outcome Y.  But how could they possibly know such a thing?  In any business other than politics, in any relationship other than citizen to politician, this kind of statement - "we created X millions jobs by spending billions of your money" - would be received as the gross mis-representation that it is.  No one would buy this kind of estimation unless they just wanted to be lied to.  It's astonishing.

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