How Much Did GDP Numbers Matter?

Megan McArdle Sep 27 2011, 3:57 PM ET

The Bureau of Economic Analysis clearly vastly underestimated the depth of the contraction that we experienced during the financial crisis. Felix Salmon thinks that this matters a lot:

The BEA is happy to try to explain what happened here -- but whatever the explanation, the original 3.8% figure was a massive and extremely expensive fail. It was bad enough to be able to get a $700 billion stimulus plan through Congress, but if Congress and the Obama Administration had known the gruesome truth -- that the economy was contracting at a rate of well over $1 trillion per year -- then more could and would have been done, both at the time and over subsequent months and years. Larry Summers warned at the time that the risks of doing too little were much greater than the risks of doing too much; only now do we know just how right he was on that front. (And even he didn't push for a stimulus of more than $700 billion.)

I would like this to be true--that is, whatever you think about fiscal policy, I would like to think that Congress sits down and spends oodles of time thinking about GDP and where it's going, and studying the data, and carefully crafting policy in accordance with their read of the numbers.

However, I am very skeptical that this is true. I think we got an $800 billion stimulus because that was a large number that didn't sound too close to "a trillion". I think that you could have announced that breadlines were forming outside the Senate dining room, and you still would not have gotten a substantially larger figure out of Congress. It's not like they were unaware that things were going to hell in a handbasket. But they had neither the will, nor, frankly, the political mandate, to spend more than that.

Indeed, to the extent that you think confidence matters, the excessively low GDP estimates might have helped rather than hurt; 9% would have scared the hell out of everyone, but I doubt it would have moved substantially more money out of congress. A hundred billion, maybe--barely measurable impact, really. But the Democrats weren't going to be the first party to spend a trillion dollars in one package--not least because the GOP wasn't going to let them.

So while I think that we should pay a lot of attention to having the best statistics we can, I doubt it mattered in this case. The economy was in free fall, Congress was pretty well aware of that, and they spent $800 billion.