TPM: Was stimulus assumption of unemployment at 8.1% too low?

[dkf]

Bleak House

In Washington over the last two months, the debate was over whether the Stimulus Bill was too large. But the math -- that is to say, expected fall in aggregate demand compared with offsetting stimulus spending -- suggested a completely different problem. Namely, that it was too small, probably offsetting a half or less than half of the demand sucked out of the economy by the collapse of the housing bubble. And as the Post reports on tomorrow's front page, the verdict seems to be in: yep, it was too small.

There are many different metrics to use to get to this judgment. But a key one is that the Obama budget, which came out at the end of last month, assumed an average unemployment rate of 8.1% during 2009. Presumably, that was the assumption behind the Stimulus math too. But since we now know that the unemployment rate spiked to 8.1% in February that prediction seems unrealistically optimistic -- perhaps by a long shot.

All of which is to say that the monthly economic data are rapidly catching up with the pessimists' assumption about kind of steep and lasting recession we have in store.

Nor is it only the size of the Stimulus Bill that is implicated in these changing numbers. Because if the administration has been assuming less bleak unemployment rates than we're likely to see, then the tax revenues that the budget is based on won't come in and 'stress tests' they're running the banks through probably aren't stressful enough.

Joining the chorus, Martin Feldstein says we're likely to need a second Stimulus Bill. Perhaps soon.

http://www.talkingpointsmemo.com/archives/2009/03/bleak_house.php

[jody]

1. Where is the economic model that is so sensitive to a wild ass guess (wag) about unemployment rates?

Related question, where are the results of best case-worst case analysis for pouring more tax dollars into a seemingly insatiable appetite of banks and financial managers?

Those are rhetorical questions and IMO the answers to #1 is no model exists and to #2 none could have been done because no model exists.

[dkf]

2. Well one of the complaints about the bank bailout is that it is adhoc

and not very well thought out.

That isn't what is being addressed though. The amount of the stimulus must have been predicated upon some assumptions in order to determine the amount of stimulus that would be needed. Since the purpose of the stimulus is to protect jobs, it would make sense that unemployment would be one factor used.

[jody]

3. Agree but if the assumption for the model used is sensitive to unemployment rates, then that model

should be presented to the public under Obama's promise of transparency in government so people who understand such things can comment.

Until the model used is made available to the public, I will believe it's mostly BS with no more substance than Bush's claim that Saddam had WMD.

[dkf]

4. For all of Obama's promises on transparency, I haven't seen much of it yet.

Much easier said than done I guess.

[jody]

5. A friend of mine, military chaplain, says "When all is said and done, more is said than done." n/t

[Kurt_and_Hunter]

6. Well, Duh. The CBO and Treasury projections are a joke, the stimulus is small and everyone knew it

One of the most annoying features of this crisis is that people are constantly discovering after the fact what everyone with the first clue already knew before the fact.

The assumptions upon which the administration has been crafting policy were a joke and taking such benign projections seriously was deeply irresponsible.

And many, many, many people said so.