December 8, 2010

By pure common sense, the economists at e21 take a long look at a new study by Daniel Wilson at the San Francisco Fed on the effect on employment from the Obama administration’s stimulus plan, which indicates that the impact was a lot less than advertised.  Instead of adding two million jobs to the economy, the Fed finds that any new jobs added had disappeared by August of this year.

According to e21, it is difficult to properly calculate the effects of the 2009 American Recovery and Reinvestment Act (ARRA) bill, as it was a nation-wide program. Though employment and growth failed to respond to ARRA as the Administration had suggested, fiscal stimulus advocates have argued that employment levels would have been lower still without the program.

Wilson’s study makes an important contribution to this debate by focusing on state-by-state comparisons. A large portion of stimulus funding at the state level was based on criteria that were entirely independent of the economic situation that states faced. For example, the number of existing highway miles was used to calculate additional transportation spending.

The study uses this resulting variation in state-level stimulus funding to determine what impact ARRA funding had on employment — including both the direct impact of workers hired to complete planned projects, as well as any broader spillover effects resulting from greater government spending. Administration economists have repeatedly emphasized the importance of this indirect employment growth in driving economic recovery.

The results suggest that though the program did result in 2 million jobs “created or saved” by March 2010, net job creation was statistically indistinguishable from zero by August of this year. Taken at face value, this would suggest that the stimulus program (with an overall cost of $814 billion) worked only to generate temporary jobs at a cost of over $400,000 per worker. Even if the stimulus had in fact generated this level of employment as a durable outcome, it would still have been an extremely expensive way to generate employment.

Well, all anyone needed to do was look at unemployment over the last 19 months to figure that much out.  We have had 19 months of joblessness at 9% or higher, a record in the post-WWII era, despite the administration’s insistence that the outlay would curtail the extension of unemployment.  That number is lower than it should be, thanks to a generational low in the workforce-to-population ratio, too.  The number of the unemployed and discouraged workers didn’t drop; in fact, those numbers have grown since Porkulus.

The rebuttal from the White House has been to argue the counterfactual.  Just imagine, they say, if we hadn’t spend $800 billion in stimulus!

The analysis by e21 addresses that argument as well saying that it is also difficult to determine the counterfactual employment growth that would have resulted in the absence of the fiscal stimulus law. To address this issue, Wilson includes other variables predictive of future employment growth. However, it is possible that employment would indeed have been worse in all states without a stimulus. It is also possible that employment would have been better than projected — for instance, if the Fed or Treasury had responded to higher unemployment through their own interventions.

Still, this result should be taken seriously, as it represents one of the few actual analyses of the stimulus program that does not rely on outdated multiplier estimates that assume their result.

Importantly, the results are also consistent with another recent analysis of government spending during Great Depression by economists Price Fishback and Valentina Kachanovskaya. During a period in which unemployment was extremely high and the costs of implementing a public works program were far lower than today, one might expect that fiscal stimulus might have proven more effective. Yet Fishback and Kachanovskaya find that a similar state-by-state analysis suggests that fiscal stimulus during the Great Depression failed to yield durable employment gains.

But Reason notes that the people pushing the counterfactual never provided any reality-based metrics in the first place:

Backers of the stimulus have always had to contend with two big problems: The first is measurement. How do we know how many jobs were created, saved, funded, whatever? Do we count new permanent jobs, or partially funded contractors, or grocery clerks whose paychecks are dependent on added business from stimulus-funded workers across town? And even if you can verify that those jobs are funded by stimulus money somehow, how do you know that the same jobs would not have been created in the absence of the stimulus? It’s a thankless task, and the administration has tended to respond by skirting the issue and relying on models that don’t really measure output at all. Wilson’s study, with its state-by-state comparisons, attempts to partly address this problem.

But his tentative conclusions lead to the second problem, which is value. Even if you find  that the stimulus did create jobs, then the question becomes: Were the results worth the price? The findings in Wilson’s study suggest that they weren’t.

Finally, we come to the basic argument used by the administration, which was that the stimulus was intended to prevent joblessness from going above 8%.  Now that we’re heading back towards 10% having never gotten below 9%, that should certify the program as a flop.  The White House and its defenders claim that no one knew how bad the economy was at that point (January 2009), but that’s simply not true.  We had already lost over 3 million jobs by that time, and we were losing 600K a month or more by then.  If all the President’s men and women couldn’t have figured out that the economy was in very bad shape, driven there mainly by the collapse of a bubble itself driven by government interventions, then we certainly can question their expertise in crafting a solution that ended up doing nothing — and costing us a lot of money in the process with yet another government intervention.

The real question at the end of the day is this: opportunity costs.  Had the government acted to restrain regulatory growth and allow investors to keep an extra $800 billion in early 2009, would we have created more net jobs by August 2010 than zero?

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