Saturday, August 22, 2009

Thanks, Dr.DeLong!

At the beginning of this month, Richard Posner published an extreme criticism for Christina Romer's prediction about the stimulus package. That article even questioned the ethical responsibility of Romer and some prominent progressive economists (Stiglitz's name was missing!!)

But there was a basic mathematical mistake in the criticism. Posner compared annual GDP with quarterly spending. Although I observed this, my inferiority complex did not allow me to publish this in my blog. After all, I am not a professional economist. I am an engineer who loves macroeconomics and in fact who loves anything that can be derived from reason.

On the other hand, Brad DeLong has no such inhibition to spot this flaw and other mistakes in Posner's article.
Posner is trying to get his readers to compare the number 5 (the percentage-point swing in the growth rate between the first and the second quarter of 2009) to the number 2/3 (the percentage share of second-quarter stimulus expenditures to annual GDP). He hopes that they will conclude that Christina Romer's claims are wrong because the effect is disproportionate to the cause: $1 of stimulus could not reasonably be expected to produce $7.5 of boost within the same quarter. But the stimulus money spent in the second quarter was spent in one quarter, so the right yardstick to use to evaluate it is not annual but rather quarterly GDP--stimulus spending in the second quarter was not 2/3 of one percent but 2.6% percent. And the level of production in the economy in the first quarter was not 6% but rather 1.5% below its level in the fourth quarter--the 6% number is not the decline from one quarter to the next but rather the rate of decline, how much the decline would be after a year were it to go on for four quarters. So the right comparison is 1.5% to 2.6%[1].

Posner is off by a factor of 16.
I am glad that my observation was right that Posner was wrong in comparing the annual GDP with quarterly fiscal spending. Thanks, Dr. DeLong for bringing it up.

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