February 17, 2012

The Stimulus Bill Turns Three

Veronique de Rugy

George Gibbs Chair in Political Economy

The result of the stimulus, we were told would be 3.5 million jobs “created or saved” over the next two years, mostly in the private sector and the promise that unemployment wouldn’t go up beyond 8.25 percent, and that, by the end of 2010, unemployment would have dropped to 7.25 percent. Here is what happened instead.

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The Stimulus bill is turning three today. The main argument for enacting a $787 billion stimulus bill was that if government spends money where it is the most needed, that expenditure would create jobs and trigger economic growth. It also assumed that in a good Keynesian fashion, the money would be spent in a timely manner, and would be temporary. Finally, the reason why the returns on government spending would be so high is that the administration assumed that for every dollar spent, the economy would grow potentially by $1.57 (that’s what economists call the multiplier and it was estimated to be 1.57).

The result, we were told would be 3.5 million jobs “created or saved” over the next two years, mostly in the private sector and the promise that unemployment wouldn’t go up beyond 8.25 percent, and that, by the end of 2010, unemployment would have dropped to 7.25 percent.

Here is what happened instead:

  • In spite promises made, unemployment has lingered above 9 percent for months. Also, for a more complete look on today’s employment numbers go here.
  • The economy hasn’t recovered as we were promised it would.
  • CEA Report from July 1 tallies the sum of the stimulus bill’s outlays and tax cuts at $666 billion.
  • CEA Report claims that total recovery jobs created or saved is somewhere between 2.4 and 3.6 million as of the first quarter of 2011 (CEA, p.2). These numbers are not based on any true count of jobs. And many studies have questioned these figures.
  • The cost of job creation is $ 278,000 per job using low-end 2.4 million job estimate by CEA above.
  • The cost of job creation is $ 185,000 per job using high-end estimate from CEA above.
  • Contrary to the administration’s promise, a majority of the jobs were created in the public sector rather than the private sector.
  • At the state level, much of the money has been spent to close budget gaps in the states, which often means keeping union-protected school teachers in their jobs and paying for public-sector jobs, rather than creating jobs in the private sector. Stimulus spending in states defers, not mitigates, the economic impact of the recession.
  • In the private sector, the green energy industry was one of the big job creator, at least for a while (think Solyndra)
  • ARRA expenditures have been increased from $787 billion to $840 billion in order to be consistent with the President’s 2012 budget.
  • The spending wasn’t timely: In October 2010 President Obama even had to concede that, in fact, “there’s no such thing as shovel-ready projects.”
  • The spending wasn’t targeted either: Stimulus funds have not been allocated according to a state’s level of economic distress. There is no statistical correlation between all relevant unemployment indicators and the allocation of funds. Also, no correlation between other economic indicators, such as income, and stimulus funding exists. See for instance this and this
  • It’s questionable  how much for the spending will be temporary and how much will become a permanent feature of our bloated budget.
  • A large portion of the job “created” didn’t come from the unemployment lines were and instead were poached from other firms. These other firms often didn’t replace that worker.

There is more to consider when thinking of whether or not government spending can stimulate the economy. For instance, Valerie Ramey of University of California–San Diego has looked at the impact of increased government spending on private activity and employment. She finds that in most cases, private spending falls significantly in response to an increase in government spending.

She finds that in general the multiplier is less than 1. Her works shows that increase in government spending lowers unemployment, but only because in most cases it increases government employment. Ramey’s work on the impact of government spending on the private sector and employment is consistent with the work of many other economists.

This may also be consistent with the fact that the mild economic recovery that we are experiencing right now happens to coincide with the reduction is growth in government stimulus spending. Kevin Hassett notes:

Interestingly, according to the Bureau of Economic Analysis, the U.S. economy grew at an annualized rate of 2.8 percent in the last quarter of 2011, an improvement over the 1.8 percent increase in the third quarter. Private spending rose in the fourth quarter through increases in personal consumption, exports, and private inventory investment, while government spending fell by 7.3 percent.

Obviously, this is anecdotal but it is worth mentioning. Now what would have happened exactly without the stimulus, I can’t say exactly. However, based on everything we know I would say that the stimulus failed and it is time to try something else.

I really recommend this paper by my colleague Matt Mitchell about whether or not the government can create jobs. In his paper, you will find everything you have always wanted to know about multipliers and other stimulus issues. For this issue, with a focus on infrastructure spending as a stimulus go here.