Stimulus did work, almost-Muscatine IA-Muscatine

New research on what actually happened to a trillion
dollars.

Even zero jobs growth in August doesn't seem to have disrupted President
Obama's faith in the economic policies of his first three years, so one theme
we'll be listening for in tonight's speech is how he explains the current
moment. Why did his first jobs plan—the $825 billion stimulus—so quickly result
in the need for another jobs plan?

For readers who want to know, an important account is offered in a pair of
new Mercatus Center working papers by the George Mason economists Garett Jones
and Daniel Rothschild, who did field research on what they call the supply side
of the stimulus.

The Keynesian theory was that a burst of new government spending would take
up some of the slack in aggregate consumer demand. This was justified in 2008,
again in 2009, and is still defended now based not on real-world observation but
on abstract macroeconomic models that depend on the assumptions of the authors.
The Congressional Budget Office's quarterly studies—often cited to claim the
stimulus created tens of thousands of new jobs—are based on such a model. By
informative contrast, Messrs. Jones and Rothschild interviewed actual people who
received stimulus dollars and asked how they spent the money.

In the first paper, the authors survey 85 different businesses, nonprofits
and local governments across the country and conclude that "As is often the case
when economic models are transferred from the blackboard to actual public
policy, there was a gap between theory and practice."

One of the major patterns Messrs. Jones and Rothschild uncovered was that the
top-down stimulus was poorly targeted. In one redolent example, a federal
contractor said he was told to use smaller, nonstandard tiles that are harder
and more expensive to install in order to increase the cost of the project. That
way, the government could claim the money was moving out the door faster. The
famous Milton Friedman line about government ordering people to dig with spoons
to employ more people comes to mind.

In another case study, a budget shortfall forced a mid-size city to lay off
185 public workers—but the city received a $4 million stimulus grant to improve
municipal energy efficiency. The manager of a construction company received
funds for "the last thing on our list; and truthfully, the least useful thing."
It happened to be a crane and a forklift.

The authors are careful to note that such anecdotes do not mean that all of
the stimulus was a waste, and they did find some success stories. The problem is
that all but the most reductionist Keynesians of the Paul Krugman school believe
it matters what the government spends money on. A dollar that eventually will be
taken out of the private economy through borrowing or higher taxes to fund
pointlessly expensive projects—a la the tiny tiles—is not the way to nurture a
recovery.

The second paper suggests that the stimulus did not "create or save" nearly
as many jobs as the models indicate. On the basis of 1,300 interviews, Messrs.
Jones and Rothschild estimate that merely 42.1% of the firms that received
grants hired people who were unemployed. Instead, they poached workers from
their competitors.

"This suggests just how hard it is for Keynesian job creation to work in a
modern, expertise-based economy," they write. The stimulus "was implemented at a
time when the Keynesian model had every chance of succeeding on its own terms.
The high level of unemployment and the rapid deadline for spending created both
the supply of workers and the demand for workers. If the job market results are
so lackluster in this setting, economists should expect even weaker stimulative
results during more modest recessions."

The lesson of such on-the-ground knowledge is that the stimulus was a lost
opportunity. In practice it became a shotgun marriage between an economic theory
justified by computer models and 40 years of liberal social priorities (clean
energy, Medicaid expansions and the rest). This produced the 9.1% unemployment
we now have.

The economy would have benefitted far more if the government had instead
improved the incentives for people and businesses to invest, produce and grow.
The President probably won't mention any of this, (he didn't) but it does explain why he has
to give his latest speech.

Democrats’ Trillion-Dollar Stimulus Failed

06/30/2010

Facts, they say, are stubborn things. And the simple fact is the Obama Administration has been the worst administration on jobs since the Great Depression??‹. That is why they are now engaged in a massive public relations offensive to convince Americans that their stimulus plan has worked and created millions of jobs. As the data below shows, every prediction the administration made about how its 2009 stimulus plan would create jobs has turned out to be wrong

Most fundamentally, instead of creating jobs and reducing unemployment, the stimulus plan created more unemployment and reduced jobs. Overall, since the passage of stimulus in February 2009, 48 out of 50 states have lost jobs. One reason is the massive debt associated with all the new government spending. Using the administration’s own calculations and expert testimony to Congress, the added debt caused by the trillion-dollar plan has already cost 1 million jobs. And the uncertainty and future tax hikes associated with this and other Administration policies are causing real job creators to pull back on hiring.

Jobs

In January 2009, administration economists predicted the President’s stimulus plan would “create between three and four million jobs by the end of 2010.” It didn’t. Instead, the U.S. has lost over 2 million jobs to date—and closer to 3 million private sector jobs when about 500,000 temporary census jobs (which will end this summer) are excluded from the calculations (Source: U.S. Department of Labor). In all, the U.S. is now about 7 million jobs short of the number the administration predicted its stimulus plan would create:

Unemployment Rate

In selling their stimulus plan, the administration predicted unemployment wouldn’t rise above 8% if Congress passed its plan. But instead of falling to 7.3% as they forecast, unemployment has hovered near 10% since mid-2009:

Private Sector Employment

Of the millions of jobs that they predicted would result from the stimulus plan, the administration promised that “more than 90% of the jobs created are likely to be in the private sector.” Again, it hasn’t happened. While government employment has grown slightly, mostly because of temporary census workers, private sector employment has dropped by some 2.7 million jobs.

Construction and Manufacturing Employment

The administration predicted that certain sectors would fare best under its plan, specifically they said there would be a boost in construction and manufacturing jobs resulting from thousands of supposedly “shovel-ready” projects: “Certain industries, such as construction and manufacturing, are likely to experience particularly strong job growth under a recovery package that includes an emphasis on infrastructure, energy, and school repair.”

Americans are still waiting. Instead of experiencing “particularly strong job growth” as Democrats promised, construction (down 13.1%) and manufacturing (down 5.8%) have experienced rates of job destruction several times greater than the overall rate of private-sector job destruction (down 2.4%):

Full-Time Employment

The administration promised that the stimulus would create not just any jobs, but good jobs providing full-time work and benefits. In fact, they said so many of those good jobs would be created that many people working part-time would be attracted into that full-time work: “A package is…likely to move many workers from part-time to full-time work.” Not so. Instead of moving workers from part-time to full-time work, the stimulus again resulted in exactly the opposite—a decline in full-time employment (down 1.8%) and a concurrent increase in unemployment and part-time work (up 0.3%):

The administration made several specific promises about how their stimulus plan would work for the American people. Instead, it has been an expensive failure for which Americans will be paying for many years to come. Rather than showing a record of job creation, the stimulus has been followed by other, dubious records: record unemployment, record number of Americans collecting unemployment benefits, and record tax hikes ahead to support the direct and indirect costs of Democrats’ 2009 stimulus plan. Those are the stubborn, and painful, facts.

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