Saturday, January 10, 2009

Obama's Economic Recovery Plan ± 80%

President-elect Obama used his weekly radio YouTube address to make bold claims about his stimulus package, the amount of growth that it will create (3.7%), and the amount of jobs that it will create (3,675,000). He based it all on this report that his incoming administration created. Everyone should read the plan. Why? It will show you the absolute lack of depth and judgment that Obama's advisers have so far. It reads more like a Freshman Economics term paper than something written by high-paid economic experts. There are nuggets in there that show that brilliantly. Here's one:
The final step is to take the effect on GDP and translate it into job creation. Not all of the increasedoutput reflects increased employment: some comes from increases in hours of work among employed workers and some comes from higher productivity. We therefore use the relatively conservative rule of thumb that a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs, or about three-quarters of a percent. This has been the rough correspondence over history and matches the FRB/US model reasonably well.
In other words, Obama's team has no clue how closely GDP growth relates to job growth, so they made up a number. So I just decided to do run a check on their numbers: 1% GDP growth is $138 Billion per year. 1 million average workers in the US would make just over $25 Billion. Obama's numbers have no basis in fact. Denninger found the most egregious example of this, here are his thoughts:
Obama: You Need To Fire Everyoneinvolved in producing your American Recovery and Reinvestment Plan.
Why? In "Appendix 1"

We considered multipliers for the case where the federal funds rate remains constant, rather than the usual case where the Federal Reserve raises the funds rate in response to fiscal expansion, on the grounds that the funds rate is likely to be at or near its lower bound of zero for the foreseeable future.

Please tell me this is a joke. Obama really believes that The Fed can hold interest rates at zero for four years and they can spend without bound, while the bond market will blithely look on at $1-2 trillion deficits annually and the economy will begin to recover?
You're kidding, right?

To give the Obama team some credit, at least they admit how much they understand. From the Conclusion:
As emphasized at many points in the analysis, there is substantial uncertainty around all of our estimates.
Hold onto your shorts, folks. We're in for a rough ride.

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