TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Gregory Mankiw considers the administration’s response to the failure of their stimulus models:

The trouble is, we have no way of knowing for sure if the model was in fact correct. To react to a model’s failure to predict events accurately by insisting that the model was nonetheless right — as Obama’s economic advisors have done — is hardly the most obvious course. Careful economists should instead respond with humility. When their predictions fail — as they often do — they should not dig in their heels, but should instead be willing to go back to their starting assumptions and question their validity.

The administration predicted that without stimulus the economy would suffer 9 percent unemployment, and with stimulus it would not rise above 8 percent. The unemployment rate for May was 9.7 percent. Their conclusion is that the stimulus wasn’t large enough, rather than questioning their initial assumptions.

Mankiw’s piece is excellent, and looks at one of the assumptions they should have re-considered—that government spending’s multiplier is 1.5, while for tax cuts it is 0.991, and that this is the sole criterion for deciding what kind of stimulus should be used.

1. The multiplier is how much effect one dollar will have on GDP. So, for a dollar of government spending (with the 1.5x multiplier), GDP would increase by $1.50. [↩]