Imagine I told you that if you were to spin around in place 1,000 times really, really fast in the opposite direction to the earth’s rotation, it would actually cause the earth to spin in reverse.
You’d think I’m crazy, right? But just for fun, you spin around 1,000 times and, after you stop being dizzy, report back to me that you did as I said.
Without collecting any actual information on the direction the earth is rotating right now, having seen your performance I announce emphatically that the earth is now in fact spinning in the opposite direction as it was. (Please ignore the fact that the sun continues to traverse the skies exactly as it has for billions of years.)
The assertion that a person spinning around can change the earth’s rotation is obviously ridiculous. But the faulty reasoning and lack of actual analysis that allowed me to make such an absurd assertion is the same kind of reasoning and analysis the Congressional Budget Office (CBO) uses to assess the impact of President Obama’s 2009 stimulus spending boondoggle.
That flawed reasoning and analysis leads it to similarly unrealistic conclusions.
The law that created the 2009 stimulus, besides squandering nearly $1 trillion, requires the CBO to report on the stimulus’s effect every three months. Dutifully, CBO has produced its latest flawed report on the effects of the stimulus had in the first quarter of 2012.
Do we really need a faulty nine-page report from CBO to figure how the stimulus is doing? The evidence is all around us that the stimulus failed. The unemployment rate rests uncomfortably above 8 percent. The economy grew at a dismal 2.2 percent last quarter. And almost 12.5 million Americans remain unemployed.
Despite all this tangible evidence that the stimulus failed, CBO reports that in the first quarter of 2012 the stimulus’s policies:
- Raised real (inflation-adjusted) gross domestic product by between 0.1 percent and 1.0 percent;
- Lowered the unemployment rate by between 0.1 percentage points and 0.8 percentage points; and
- Increased the number of people employed by between 0.2 million and 1.5 million
The CBO is so far off from reality because, like me saying the earth is rotating in the opposite direction without looking to verify if it actually was, CBO doesn’t actually measure the impact the stimulus is having by collecting economic data from families, businesses, or other government agencies. The problem isn’t a lack of resources but the fact that few of these potential responders could possibly tell CBO what they would be doing absent the stimulus.
Instead, CBO uses the same economic model it used to predict the effect that the stimulus would have on the economy before Congress passed it and President Obama signed it into law.
The problem is that the CBO model assumes that deficit spending stimulus works, just as I assumed that if you spun around 1000 times the earth would change direction. The problem is a matter of circular logic, or “begging the question.”
The CBO model said that if the government spent $831 billion through the stimulus, all sorts of beneficial economic effects would result. Now that President Obama and Congress have gone and spent all that money through the stimulus, the CBO reruns its model and reports back that those effects it previously predicted have indeed occurred.
Both the CBO’s conclusion and mine about the spin of the earth are wrong—not only because we used circular logic to arrive at them but because they are also based on terribly flawed premises.
CBO’s flawed premise is that its model assumes the same fiscal alchemy that beguiled policy makers in early 2009: that Congress and President Obama could stimulate the economy back to growth by taking that $831 billion out of the economy and then putting that money back into the economy through the machinations of the federal government’s bureaucracy.
Government spending can’t stimulate the economy, because before it can spend it, the government has to first take it away from the private sector. For every dollar it spends, it destroys a dollar—at best—of economic output elsewhere in the economy. And that doesn’t even account for the economic downside of the tremendous run up in debt such massive spending creates.
Only families, businesses, investors, and entrepreneurs can generate growth by increasing their productive activities in response to new opportunities. No matter how many times CBO runs its model to try and prove otherwise, that won’t change.