Krugman Eviscerates The Latest "Stupid Stimulus Tricks"

Blog ››› ››› JEREMY HOLDEN

Nobel Prize winning economist Paul Krugman threw cold water on the latest "stupid stimulus tricks" media conservatives are using to attack the 2009 legislation.

Economists ranging from the nonpartisan Congressional Budget Office to Moody's have analyzed the stimulus and estimated that millions of additional Americans would have been unemployed without it, a fact critics have steadfastly denied.

Now those critics are hyping a recent state-by-state study of employment rates, authored by Timothy Conley of the University of Western Ontario and Bill Dupor of Ohio State, to call the stimulus a failure.

But according to Krugman the analysis is flawed:

What this study claims to do is estimate the effect of the stimulus by looking at cross-state comparisons. So the first thing we should understand is just how difficult it is to do that.

Remember, the stimulus was not big compared with the economic downturn. The original Romer-Bernstein estimate was that it would, at peak, reduce unemployment by about 2 percentage points relative to what it would otherwise have been. And most of that effect was supposed to come through measures that would have been common to all states: tax cuts, transfer payments, etc.. At most, differences between predicted effects among states should have come to no more than a fraction of a percentage point off the unemployment rate.

Meanwhile, there were large differences in actual unemployment changes by state.

Krugman goes on to lay out some of the factors that would contribute to state-by-state differences in unemployment - factors that are not related to the recovery act.

Krugman isn't the only accomplished economist poking holes in the study. Yesterday Dean Baker, co-director of the Center for Economic and Policy Research, laid out "a few problems" with the paper including "the problem of cherry picking." Krugman echoed Baker's concern:

[T]he best interpretation is that the authors tried something that happened to give the results they wanted, then stopped looking.

Posted In
Economy, Jobs, Wages, & Unemployment
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