Will Stimulus Spending Create New Jobs? We May Never Know

by Olga Pierce, ProPublica

The Obama administration has unveiled its plan for measuring how well the stimulus package works, and the bottom line is: Many questions will remain unanswered.

While pitching the stimulus package, the administration batted around the number 3.5 million when talking up how many jobs would be created or saved, based on an estimate by Christina Romer, an economist who now heads the Council of Economic Advisers, and a colleague in what was then the office of Vice President-elect Joe Biden.

The administration's jobs estimate relied on some broad rules of thumb (otherwise known as multipliers), assuming, for example, that every one percent of GDP the government spends will result in a 1.6 percent increase in GDP and that every one percent increase in GDP equals about 1 million jobs saved or created.

But that was just an estimate to pitch the plan, and soon hard numbers will start flooding in from agencies and contractors telling us exactly how many workers the $787 billion stimulus package has saved, right?

Not exactly.

A report recently released by the Council of Economic Advisers (PDF), a three-member team tasked with advising the president on economic affairs, suggests that real-world data will not supply a firm standard of accountability for stimulus spending any time soon. The report is the first in a series of quarterly reports tracking the effects of the stimulus.

In the short run, the council instructs agencies to use the rule that $92,000 equals one job-year (one job for one year) to determine how much employment their programs are generating. The $92,000 number is derived using the administration's earlier macroeconomic assumptions and, the report says, is intended to make agency estimates mirror the administration's. This will make the agencies' numbers a poor check on the administration's job figures.

Later, data will begin to come in from recipients of stimulus funding, which are required to carefully report how many jobs are created or saved. This is more complicated than it seems. Surely you count the employees of the construction contractor hired to renovate the government building, for example, but do you count the subcontractors hired by the contractor? And what about workers at the paint factory who would have been laid off without business from the construction project? What about workers at the nearby grocery store who keep their jobs because of increased business from hungry construction workers and paint manufacturers?

The report offers a sneak peek at the final guidelines the Office of Management and Budget is expected to release soon for addressing these very questions.

In the renovation example above, the construction contractor's employees and the subcontracted workers would count as jobs created or saved, but the other jobs wouldn't, according to the guidelines.

The contractor would then submit a report with the number of jobs created and saved, expressed in full-time equivalents (the total hours of work created divided by the number of hours worked by a full-time worker), along with a brief description of the types of work involved, which will later be used to evaluate the quality of jobs created by stimulus funding.

Lest employers be tempted to cheat, the OMB will check the data for "completeness and plausibility" by looking for outliers among similar projects and cross-checking information about expenses and wages with labor market data from the region.

Why can't we just add up the numbers from these reports to find an aggregate number of jobs created by stimulus spending? There are several problems with this, according to the report.

The first is that those reports will only document job creation from the $271 billion in direct government spending -- the rest of the stimulus was spent on tax cuts, state fiscal relief and transfer payments like Social Security and food stamps. No direct reports will ever come in on the number of jobs created by those expenditures.

The second is that the reports will only measure direct job creation (think of the construction example above) and not indirect effects, even though the administration is counting on indirect job creation to reach its 3.5 million job mark at the end of 2010.

Finally, the council apparently doesn't trust those reports very much.

"There will likely be inconsistencies and measurement error across the individual reports," the council writes. "This limitation is present whenever thousands of recipients with very different types of projects are asked to provide information."

But the Obama administration does have a rough estimate of how many jobs will be created by direct government spending. (For the record, $100 billion creates 1,085,355 job-years.) So what happens if its estimate differs from the direct job-creation reports?

The answer, given by a senior administration official, is enough to make any social scientist squeamish: "It will be a two-way test of how good the numbers we get back will be and also a test of multipliers."

In other words, if the job-creation numbers the administration gets from real-world data disagree with its estimates, they reserve the right to blame the data. From an accountability perspective, this will make it difficult to assess the stimulus' successes and failures.

But Romer and her associates propose some avenues for evaluating their own estimates, like regular checks to see if money has gone out on schedule, microeconomic analyses to estimate the number of indirect jobs that result from government spending, and comparisons of the unemployment rate with baseline forecasts of the unemployment rate without stimulus.

ProPublica is America's largest investigative newsroom.

Comments

[Aluceo]

HOW THE STIMULUS PLAN HAS BEEN WORKING ALREADY AND WHY IT IS BOUND TO GATHER PACE

The stimulus plan in of itself has halted the dramatic plunge in business and consumer confidence with the very likely threat of an economic depression earlier in the year, and businesses and consumers taking a less weary and more upbeat attitude to the future. Maybe more than anything else this will be the most significant impact of the stimulus package in the long-run enabling a spectacular recovery from the real possibility of depression before its passage. Businesses and consumers have become more and more confident that spending from the stimulus in the upcoming months will provide a solid environment for economic activity thus encouraging investment, reducing the pace of job losses and encouraging consumer spending. In other words, the stimulus package has avoided “a cycle of economic downturn to depression” and is now about to engender “a cycle of economic upturn to recovery”.

The stimulus package cash handouts and other social initiatives have played no minor part in lessening the burdens on individuals of the economic downturn and the consequent increase in the number of people unemployed thus palliating the effects with regards to mortgage, health coverage and consumer spending.

[Aluceo]

The stimulus package has halted the lost of jobs in the areas of education and other state level services and enabled States to avoid budget bankruptcy (caused by the fall in revenues due to the economic downturn) with the result of avoiding indirect job losses in the private sector as well.

The stimulus package is bound to lead the way for new jobs creation to be followed suit by direct private sector investments with the consequence of increasing spending in the economy and accelerating economic recovery. It should be noted that jobs created by the stimulus will have a multiplier effect in the creation of jobs by private enterprises.

Perhaps more fundamental for long-term economic recovery, given the areas of investment of the stimulus package (infrastructure, energy and green jobs, education. etc.), it is the type of government investment required for renewing long-term economic growth. As was the case with FDR's New Deal in the 1930s and Eisenhower building of interstate highways and investment in the sciences in the 1950s, the stimulus package is bound to restructure the foundation of the US economy within which private enterprise will thrive.

[Aluceo]

The fundamental element in the criticisms levied against the stimulus package that it will increase the US deficit is the total disregard by most critics of what would have happened without the stimulus with respect to avoiding the real threat of a depression, raising business and consumer confidence and restructuring the economy. Thus providing a good foundation for real growth in the long-run (boostered by the Stimulus and led by private enterprise) with economic growth by itself and healthcare reform allowing for deficit reduction in the long-run.

While the Stimulus Package has often come under this one-sided criticism of increasing the US deficit, such an argument can only be credible to the extent that it elicits how the results mentioned above which have been obtained (and are to be obtained) by the Stimulus Package could have been attained otherwise. Most critics of the stimulus package seem to think that this economy which was at the very brink of collapse simply avoided a depression by some miracle and that by the same token recovery is bound to occur by magic. To the extent that their arguments fail to answer these fundamental facts about avoiding a depression and beginning a recovery, to that extent, such arguments can hardly be considered credible.

[Aluceo]

The reason for the high job losses is very simple. Those jobs were going to be lost anyway as business and consumer confidence entered a vicious cycle to depression following the failure of the financial system - these job losses arose out of lack of confidence in the financial system. Actually, the stimulus role at the onset more than any immediate spending in the economy itself has been to provide assurance to consumers and businesses that government will spend in the economy thereby upholding consumer and business confidence and avoiding the real prospect of a depression. So the stimulus first role has been "anticipatory" in forestalling a depression.

Believe it or not, it is not out of the question that without the stimulus plan we might have been talking now about the loss of not 1.6 million jobs but 5 or 6 million jobs at the trend at which consumer and business confidence went on falling before its passage. See link on the rise of consumer confidence since the stimulus plan was passed in mid-February 2009.
http://www.market-harmonics.com/free-charts/sentiment/consumer_confidence.htm

Actually, the word "stimulus" here can be misleading in that it underemphasizes the effect of the stimulus in arresting a grave and downward spiral of the economy and rather draw focus mainly on creation of jobs which is the second and yet to fully come dimension of its impact.

[Aluceo]

The Stimulus is rather like a massive and complex national project. A project can be broken down in two broad categories: design and execution. At the design stage (the first few months of the Stimulus), everything is being organised and put in place administratively with relatively little being carried out. The upcoming months will be the period when the massive spending and investments will be executed at an exponential rate. In fact, 1 billion dollar is already being allocated each day for Stimulus projects.

In layman’s terms, the Stimulus is needed for the simple reason that with the failure of the financial system, businesses and consumers were less willing (uncertainty) and less able (banks failures and failure to provide credit) to produce and spend in the economy implying that companies sold less goods and services than usual and so the companies had to lay out workers who in turn bought less and so the cycle goes (and this might just as well have led to a depression).

What the stimulus is meant to do, and is doing, is to incite and give businesses and consumers the confidence to keep on producing and spending respectively for the upcoming spending in the economy it is to generate exponentially. Initially by giving tax breaks, benefits, spending to maintain teaching and social services jobs and then spending on stimulus projects contracts given to companies which are then encouraged not to lay off workers. All these with the consequent multiplier effect in the economy.

[Aluceo]

Companies and consumers effectively bought to this idea once the Stimulus bill was enacted and kept on producing and consuming respectively in anticipation that upcoming Stimulus spending will maintain a stable economic environment from which recovery is possible. Hence the reason why the stock market and consumer and business confidence started rising. This effort was accompanied by the bank bailout and efforts to provide credit to consumers and companies.

It is effectively because the Stimulus Package is real, a commitment of 787 billion dollars by the US government for real economic projects, that consumers and businesses bought to the scheme and started acting in a positive manner in anticipation of its positive impact in the upcoming months (the Stimulus Package direct impact should enter in full force by the fourth quarter). In fact, many economists have even argued that the amount provided for the Stimulus should have been much more higher.

I’ll argue that irrespective of party creed, it will seem to me that the criticism levied against the Stimulus is much more of a “political vogue” (and has nothing to do with “realistic” economics) naïvely taken up by the media which tend to operate on the basis of “two sides to any story” (not a criticism though). The milestone which any such critical arguments has to overcome is to answer the question: how could a depression be avoided and a recovery started following the failure of the financial system?

[DuganS1]

The size of the stimulus plan at $787 billion is misleading. About $80b is just an AMT patch. Another large chunk that was supposedly to be used for infrastructure projects is simply going to patch up state budgets. No new infrastructure work will be done on net, as the federal money will merely replace some of the drop in state and local spending which is way down because of budget short falls. Overall construction in the US will still be way way down in 2009 from 2008, and infrastructure construction in particular will be down in 2009 and 2010 from 2008 and 2007 levels. People will see a few extra dollars per paycheck from the payroll tax cut and people will get extra cash from the rebates, but on net this spending is unlikely to create more than a trickle of jobs and likely won't even save many. It may speed up the inventory correction cycle by a few weeks and may keep some folks employed in retail jobs, but it still appears to be completely ineffective as a stimulus for the economy. So far the only successful stimulus program to this point has come out of China. But that has caused an increase in commodity prices (like gasoline and copper) and has likely mitigated any positive effects from the US fiscal stimulus.

[sposton]

I don't think the stimulus will do much good on the macroeconomic level. That is not to say it has no value to the people who will owe their jobs to it. It is being spent too slowly and most of the money is being spent on the wrong things. Plus it is probably too small to make a real difference.

[sc300nc]

You don't think they didn't know going in that there is no way to prove or disprove any numbers they want to throw out? It's all smoke and mirrors. Take the data and use it to show what you want it to show.

[Sinick]

As long as stimulus spending doesn't go to the banksters, it will create more jobs. There have been minimal layoffs in the financial community so obviously there are no jobs that need to be created.

Banksters will only put the money into their own pockets.