At a June 23rd Budget Committee hearing, Rep. Tim Huelskamp, R-Kan., pressed Congressional Budget Office Director Douglas Elmendorf to identify specific government spending programs that lead to economic growth. He specifically asked him if Medicare or Social Security drove economic growth. Elmendorf said neither program was “an important driver” of economic growth “in the long term.” Elmendorf added:
Huelskamp then asked Elmendorf to follow up with a letter that identified the “particular programs that you believe drive economic growth.” Elmendorf sent Huelskamp that letter last week, and he failed to identify any specific program that drove economic growth. This is the closest he came:
Notice that while Elmendorf does name some types of discretionary spending that “may” help economic growth, he can’t name any specific programs that he CBO has confirmed actually do. For example, he doesn’t say if the $8 billion that the Obama administration spent on high-speed rail helped create long-term growth. This isn’t Elmendorf’s fault. The CBO is simply incapable of identifying which, if any, specific government programs help economic growth because their Keynesian tools for analyzing the economy are unable to do so. Arnold Kling explains:
Suppose that we all work at the GDP factory making GDP. Unfortunately, spending is down, so some of us are laid off. The difference between the amount of GDP that the GDP factory could produce using all of us and the amount that is actually demanded is called the Output Gap.
The Output Gap looks like a $20 bill that is being left on the sidewalk. If somebody would just increase spending, it would help close the Output Gap, raising GDP and lowering unemployment. Stimulus certainly must work.
I am not comfortable with the GDP factory picture. We are not all interchangeable inputs producing the identical output.
For Elmendorf and the CBO, however, we are all interchangeable parts in the national GDP factory. For them, it doesn’t matter how the government spends money, just that it does. In the CBO’s eyes wasting $8 billion on a high-speed rail train to nowhere is just as beneficial to the economy as $8 billion spent on a highly used highway. Huelskamp did a fine job of drawing this out.
