Thursday, February 05, 2009

CBO Projects that Stimulus Package a Net Loss

Allah Pundit on Hot Air brings up a Washington Times article discussing a Congressional Budget Office report on the stimulus plan. The Times reports:

CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.

CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net. [The House bill] would have similar long-run effects, CBO said in a letter to Sen. Judd Gregg, New Hampshire Republican, who was tapped by Mr. Obama on Tuesday to be Commerce Secretary.

Allah then asks if this is correct:

The confusion lies in the term “on net.” Does that refer to the entire period from 2009 to 2019 or the period not including 2009 and 2010, since specific growth numbers for those two years are provided? If the former, then the Times is right and CBO is claiming that the loss in GDP from 2011 to 2019 will wipe out any growth over the next two years for a net loss. If the latter, then the Times is way off.

The letter is available on the CBO website though, so we can take a look, and it seems to back up the negative viewpoint.

From the intro:

At your request, the Congressional Budget Office (CBO) has conducted an analysis of the macroeconomic impact of the Inouye-Baucus amendment in the nature of a substitute to H.R. 1. CBO estimates that this Senate legislation would raise output and lower unemployment for several years, with effects broadly similar to those of H.R. 1 as introduced. In the longer run, the legislation would result in a slight decrease in gross domestic product (GDP) compared with CBO’s baseline economic forecast.

Later in the letter:
Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net. H.R. 1, as passed by the House, would have similar long-run effects. CBO has not estimated the macroeconomic effects of the stimulus proposals year by year beyond 2011.

It indicates several times in the paper that its methodology is calculating a not a year by year change, but a cumulative change from the baseline. Here it is in the endnotes. From table 1:

Estimated Macroeconomic Impacts of the Inouye-Baucus Amendment in the Nature of a Substitute to H.R. 1, Fourth Quarters of 2009, 2010, and 2011
2009 2010 2011
GDP (Percentage from baseline)
Low estimate of effect of plan 1.4 1.2 0.4
High estimate of effect of plan 4.1 3.6 1.2

And from table 2:

Note: For each option, the figures shown are a range of "multipliers," that is, the cumulative change in gross domestic product over several quarters, measured in dollars, per dollar of additional spending or reduction in taxes.

So the Washington Times, and Allah Pundit are more or less correct, the CBO predicts that by 2019 the cumulative effect on GDP will be .1% less than it would be otherwise. Of course this is not a huge difference, I suppose it matters whether you want your cake now or later, but it does lend credence to Michelle Malkin referring to it as the Generational Theft Act of 2009.

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