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Bad stimulus math

Business - Image -_1266424126226.jpegYesterday's posts on the stimulus provoked a lot of reader e-mail. One point, in particular, kept coming up: If you divide the bill's spending by the bill's job creation, it doesn't look that good. "What is $800 Billion divided by 2.5 Million jobs?" Wrote one reader. "I think it's $320,000 per job! Is that a good deal for me, the buyer/taxpayer?"

That would be a very bad deal for you, the buyer/taxpayer. But it's also not the deal you got. The stimulus was meant to create jobs. But it was not a job-creation bill. For instance: Unemployment insurance and COBRA benefits are very important forms of relief for the suddenly unemployed, and they stimulate the economy because the unemployed have more money to spend, and that even creates some jobs. But the correct evaluation is not how many jobs are created by unemployment insurance, but what sort of relief that insurance provides to the unemployed and what sort of stimulus it delivers to the economy.

Or take the payroll tax credit. That's $400 per worker and $800 per family in 2009 and 2010. We're spending a lot of money on it. The idea is that it offers some relief to cash-strapped families, and they will spend that money, which will stimulate the economy. That might create some jobs downstream, but a lot of the money is just going to help families make ends meet.

Or take the $15.6 billion in Pell grants. That's there to help kids go to college even though their family's finances might have just collapsed. It doesn't create many new jobs (though you could posit some indirect effects), but it's important to future economic growth that the recession doesn't leave us with a cohort of workers that doesn't have the education they need.

You can look through the stimulus projects here and run the thought experiment for each one. A lot of them, particularly in the infrastructure category, are direct job creation, though they also come with attendant expenses: When you build a bridge, you're hiring builders, but you're also paying for the concrete and the steel that ends up in the bridge.

The stimulus bill was, well, a stimulus bill. That's related to, but not precisely the same as, a job-creation bill. Indeed, one reason Harry Reid stripped unemployment benefits and COBRA out of the jobs bill the Senate is about to consider is that those programs make a jobs bill look like a bad deal, even if they're some of the most important programs both to stimulate the economy and relieve the burdens of workers.

But you have to blame the administration for this, at least in part: They sold the stimulus in terms of job creation, rather than simple economic growth. That made sense, as job creation is what most worries Americans. But it's also a measure that captures some of the bill's benefits, rather than all of them. One useful data point here is that even as job losses are slowing -- and the stimulus deserves some credit for that -- growth has actually turned positive again, though that's rarely something that people think about in terms of stimulus spending.

Graph credit: New York Times

By Ezra Klein  |  February 18, 2010; 9:48 AM ET
Categories:  Stimulus  
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Next: Anthem is not alone

Comments

1) If people are hired to build roads, you can say $200,000 for a job or $200,000 for a road.

2) Is the post so important that you had to repeat the text?

Posted by: fuse | February 18, 2010 9:55 AM | Report abuse

2) repeated text eliminated - thanks

Posted by: fuse | February 18, 2010 9:56 AM | Report abuse

That's all well and good, but it's Obama/Biden claming that the stimulus saved/created jobs. We're just pointing out the price tag. If they didn't want number thrown back in their faces, they should shutup about the jobs they claimed to have saved. Jobs that will have to go away when the stimulas ends.

Posted by: obrier2 | February 18, 2010 10:22 AM | Report abuse

"One useful data point here is that even as job losses are slowing..."

Have you read the news today? I'm afraid the numbers don't support your optimistic assessment.

http://www.washingtontimes.com/news/2010/feb/18/jobless-claims-rise-unexpectedly/?feat=home_headlines

"The number of newly laid-off workers filing applications for unemployment benefits unexpectedly surged last week after having fallen sharply in the previous week. The gain dampened hopes about how quickly the labor market may improve this year."

Posted by: Mary42 | February 18, 2010 10:31 AM | Report abuse

Is there any single more expensive mechanism for providing health care benefits than COBRA? No, there is not. The unemployed should have been made eligible to buy in to Medicare.

I laughed out loud when Obama was touting the great work Biden had done in overseeing the expenditure of stimulus funds and telling people to go look at recovery.gov if they want to see all the wonderous things upon which their hard earned dollars are being flushed down the toilet. He ought to have put as much distance as possible between himself, his administration, and that black hole of money. But he owns it now. Yes indeed, he owns it now. And the Republicans have the perfect sound bite to hang it around his neck.

Posted by: bgmma50 | February 18, 2010 10:36 AM | Report abuse

Ezra: you need to get off the Progressive bandwagon and realize that any growth is illusory and that instead of spending, the American people are actually saving at a higher rate. It also might help if you understand that the last Fed auction was an unmitigated disaster; a BIG RED FLAG. The MSM is not serving the American people well when it emphasizes "spin" and ignores truth.

Posted by: apberusdisvet | February 18, 2010 10:39 AM | Report abuse

This is becoming a recurring theme. The people of the United States are being directly injured by the failure of the White House communications team to be honest and to do their job promoting the administration's agenda.
When will the President wake up to this and make the requisite changes in his staff?

Posted by: lostinthemiddle | February 18, 2010 10:44 AM | Report abuse

Man, I totally agree with critics. 320,000 per job! I mean, when you figure out how much the average taxpayer paid into that, it's outrageous. I'd much rather have my .0032 cents back and that person looking for jobs and his family wondering how it's going to pay for needed goods and services. I mean, what a rotten deal!

Posted by: y2josh_us | February 18, 2010 10:48 AM | Report abuse

All your comments in this post about how certain of these items stimulate the economy are ill-informed because they fall prey to the broken glass fallacy. If you don't know that one, read Hazlitt's Economics in One Lesson, it's a classic.

It's basically the notion that if a vandal breaks the glass in a shop keepers window, the town is better off because the glass maker makes a sale and now has more money to spend. The problem is that, before the vandal broke his window, the shop keeper had that money AND and window. Now, he no longer has that money because he had to spend it to replace the window. So, he has less money to spend. The town is not better off as a whole. It just shifted the money from the shop keeper to the glass maker.

All the stimulus bill did was take money from one group of people and give it to another. That doesn't stimulate anything.

It boils down to this, that money had to come from somewhere, the government didn't create it out of thin air.

The government didn't actually HAVE any of the money they spent in the stimulus bill. They borrowed every cent of it. So, we - the tax payers - have to pay that back with interest. Plus, the gov't issuing that debt crowds the capital markets and makes it more expensive for companies who want to borrow money for expansion (which actually does create jobs and stimulate the economy). The net effect is negative.

Posted by: Avar | February 18, 2010 10:50 AM | Report abuse

HOPELESS


"Ezra: you need to get off the Progressive bandwagon .."

Whoa. You'd stand a better chance of E.K. understanding how STEAL-O-CRATS hated the super-majority rule under Reagan and Bush. All that happens right after MESS-iah admits STEAL-O-CRATS spend the most.

Pathetic. Nov. 2 -- STEAL-O-CRATS out!

Posted by: russpoter | February 18, 2010 10:54 AM | Report abuse

obrier2 - That's disingenuous because not all the funds went to 'saving jobs' in the immediate. Trying to prop up infrastructure and stop the bleed of jobs in the immediate at the same time will never necessarily result in a everything being hunky dory right from the get go. But infrastructure investment is needed to make measures to prevent further bleed and preserve jobs both made and retained.

Trying to divide the whole stimulus by the number of jobs remains disingenuous because it's not all going to jobs in a direct fashion. That's Ezra's whole point.

And for those who are complaining about the lack of 'net jobs' created, I do wonder, do you blame the stimulus for every job lost, net, or do you recognize that there's the possibility of even worse job loss without the stimulus.

The whole package is hardly perfect, far from it in fact. But I think it's ridiculous to say that the stimulus itself, and by extension, Obama, is personally the CAUSE of every job lost.

Posted by: kryptik1 | February 18, 2010 10:54 AM | Report abuse

Avar,
First of all, your analogy is flawed. If anything Wall Street bankers broke the world economy and the government is trying to step in to pay for repairing the glass. Furthermore, your point about crowding out is wrong. In a nearly zero interest rate situation, the gov't can borrow at almost no cost (at least in the short term) which indicates that investors are hoarding cash and fleeing to safety (i.e. safe, short term gov't debt). Thus there is no increase in interest rates for companies and individuals trying to raise money in capital markets (or via bank loans) cause no one wants to take any risk. It's a classic liquidity trap that only gov't stimulus can break in a zero interest environment.

Posted by: scudderw | February 18, 2010 10:59 AM | Report abuse

Ezra, yesterday in your post on the same subject you claimed 2 million jobs created by Obama-Stimulus. Today it's 2.5 million and by tomorrow it's going to be 3 million. I guess by the end of next week unemployment should be nonexistent all due to the liberal special interest boondoggle Obama-Stimulus which has only spent a little over a third of the hot checks it was given.

Posted by: RobT1 | February 18, 2010 11:16 AM | Report abuse

An easy way to state the obvious is that even if you did not lose your job, you, in fact, did benefit from the stimulus bill. I know I did, but not to the extent of going from 0 income to having income.

Posted by: Wallenstein | February 18, 2010 11:19 AM | Report abuse

How long is the Government going to keep extending unemployment benefits? I know people who've been receiving unemployment benefits for two years and have just stopped looking for a job because they have learned to live off the government. I think unemployment becomes a crutch for people.

Posted by: upset987 | February 18, 2010 11:21 AM | Report abuse

kryptik1 My point was that Obama brought this on himself. He's the one claiming success, the rest of us are just calling his B/S. I know what Ezra's point was, but yesterday was all about the jobs Obama saved/created.

Posted by: obrier2 | February 18, 2010 11:52 AM | Report abuse

"Or take the $15.6 billion in Pell grants." better idea would be to spend $0 on pell grants and find out if colleges and universities value diversity as much as they like to say they do.

Posted by: NoVAHockey | February 18, 2010 12:08 PM | Report abuse

Ezra,

you're right. Those commenters that used shoddy math should have been corrected. Then again you're using shoddy reasoning when explaining Anthem and the increases other insurers have had. Where's your admission that you're wrong and that its due to risk adjustment and the lack of a requirement for coverage?

Posted by: visionbrkr | February 18, 2010 12:11 PM | Report abuse

Despite Ezra's sunny optimism though, there are more job applicants than jobs out there. Imo, better a crutch to help them hobble along, then have them figure out other ways of feeding their families two years on... If you remember the 60s and 70s, there are other less desireable means "wealth redistribution" that significantly impacted the crime statistics.

This isn't Iraq kiddos: We broke it, we have to fix it. Or continue living in the detritus of the situation our economic whizards in the past decades have created. It ain't going away quickly folks, no matter the sunny optimism or the hope/change promises.

The fact that so many who helped created this mess are now "leading" us out of it ... we all do understand it's going to get a lot worse with the economy until it gets better, right? Some boats will float in the economic downturn (often those preaching false populism, and counseling with their economic expertise -- congrats on your newest promotion Ezra, btw) but we all have to live with those boats that are currently sinking. No withdrawal from America, unless you're Halliburton, right? ;-)

Read Bob Herbert in the NYT for a realistic assessment of how this economy is changing the psychology, and lifestyles of those affected. It ain't pretty, and like or not, it's our country hurting out there, and with no realistic as of yet way out. No wonder nobody's spending except for the basics and everybody's trying to hang on to what they got.

If you understand demographics, you're going to have some "winners" based on this current SS/insurance setup, but even more losers kept down, despite their best efforts to honestly compete. When the burden falls to the healthy poor to pay the insurance bills of their better offs, something is definitely wrong with the prescriptions being presented.

When we base our educational systems on equality, instead of encouraging excellence; when we spend school funds on freebie breakfasts over the high-tech materials necessary to compete with our Asisan counterparts; when we keep the service jobs but ship all the industrial production overseas; when we favor corporate interests via regulation over the smaller guy just getting set up with his entreprenurial ideas and modest plans to build a business for himself ...

You tell me what the future holds.

Posted by: Mary42 | February 18, 2010 12:11 PM | Report abuse

Ezra, you do have a fair point that a large portion of the stimulus was there more so to help people than create jobs. I agree with you and some of the comments above that the Administration shouldn't have called the bill a stimulus and point to estimates of the jobs created if it didn't want the price per estimated job thrown back at it, although the 'Stimulus and Cushion the Blow' bill sounds clunky.

However, I think the math still stands, and here's why.

I'm pretty sure (I'll admit I could be wrong about this) that the modelers who are estimating that the stimulus will increase net employment by 2.5 million are taking all of the comfort measures of the stimulus bill into account. While unemployment insurance extenstion is intended to help the unemployed, and tends to reduce the supply of labor, the modelers are probably assuming that those dollars paid out in unemployment checks are going towards people with high marginal propensities to consume and putting that into the model will show unemployment insurance going to goods and service consumption and lifting net employment. Similar assumptions are probably made for the payroll tax credit. So taking out the 'comfort' measures from the cost side of the bill means you need to take out any jobs assumed to have been generated by that spending.

In any case, the dollars per job critique is a bit moot (even though I used it myself yesterday in semi-serious fashion), since there is no way to know with any kind of certainty how many jobs the stimulus actually created. As Arnold Kling put it, the primary determinant of the outputs from models that estimate the effect of the stimulus is the modeler's priors, not necessarily the data.

http://econlog.econlib.org/archives/2010/02/macroeconometri_1.html

Posted by: justin84 | February 18, 2010 12:56 PM | Report abuse

Pell Grants probably do little to increase college enrollment. If students are rational they will go to college anyway--it the real cost of not going is in the $100ks so why would $20k matter so much? If students aren't rational though they (for the most part) won't know about the Pell Grants and it won't factor into their decision to go.

So the theory that Pell Grants matter is based on an odd set of assumptions. (The few people that might benefit are people who went from having their parents pay for them to getting the gov too, but wouldn't have gone if they had to have some debt. I doubt there are many people like this--how many people went from being very rich to dirt poor?)

Posted by: steve10c | February 18, 2010 12:58 PM | Report abuse

Klein talks about how the stimulus money is designed to shore up other aspects of the economy, such as unemployment and health care rather than create jobs. These extra benefits (and the stimulus package) wouldn't be needed if the unemployment rate were, say, 5%. The ultimate goal of the stimulus HAS to be creating jobs - otherwise, it is just an expensive painkiller. It is perfectly legitimate, therefore, to look at the number of jobs created and saved vs. the cost of the stimulus.

Posted by: invention13 | February 18, 2010 1:20 PM | Report abuse

If all you got is "STEAL-O-CRATS" and "stimulas (sic)" to talk about, why are you wasting time writing a comment? You will move no opinion with misspellings and insults. If the best you can do is insult Democrats, you're really not doing your party any good. All you do is cement the wrongheaded impression that all Republicans are idiots.

The other problem I see is the great disconnect between elite opinion in the Republican party and the rank-and-files. When I speak to the rank-and-file I hear a bunch of dangerous nonsense from last year (just like here in these comments) but the Republican officeholders seem to be tempering the crazy just a bit. Was there a memo y'all missed?

It may come as a surprise, but folks who don't agree with you politically aren't doing it just to annoy you. Their experience has led them to different conclusions. I don't think of Republicans (or conseravtives or whatever you want to call yourselves) as idiots, liars or evil people. They certainly have a different viewpoint. Occasionally that viewpoint seems to be based on premises I reject. Other than matters of morality (torture, for example) I generally try to assume folks I am discussing issues with are operating in good faith.

Just assuming that much might help things a great deal. Just realize that it's often far more effective to attack an idea than a person. Attacking a person doesn't do anything for your ideas. It just makes you look bad. Attacking the idea makes you look better and actually might defeat that idea.

So it's not "Obama is a socialist." Whether he is or not, you have not given anyone a real reason to reject Obama OR Socialism. On the other hand "government regulation of insurance companies will lead to increased costs and inefficiencies in care because medicine, as an industry, is ill-suited to top-down solutions" attacks the policy. Sure one doesn't make a very good bumper-sticker, but if you're reading Ezra you really aren't into bumper-sticker politics.

Let's just remember that most of us are Americans. Most of us do want what we think is best for the country. If folks at the ground level don't start demanding some civility, there won't be any. I remember in 2000 I worked the polls alongside Republican volunteers. We disagreed vehemently on a number of issues. Even so we were able to calmly discuss the issues and while we didn't all agree, we certainly were all friends by the end of the day. Now I can't even talk to good friends about politics without worrying about punches being thrown.

Democracy assumes an engaged and informed electorate. If we allow Washington insiders to pump up tribalism to the point where discussion is impossible, we will lose any meaningful voice in how Washington does business.

Posted by: jjhare | February 18, 2010 1:21 PM | Report abuse

@Avar,

I think you can get some temporary output gains even in the broken window scenario. I think you have to take into account the demand for money balances.

Let's revisit the shopkeeper scenario. He has $1,000 on hand, and his desired money balance is $750. In Hazlitt's story, I believe that he was going to spent $250 on a suit, and that would get him to his desired money balance (a feature of the story which I added). The window is busted, and it will cost $250 to fix. Hazlitt says that the shop keeper then won't buy the suit, because he has to spend the money on a window. However, let's say that the shop keeper has a wedding to go to and needs to buy that suit. In that case, the shop keeper's money balance falls to $500, and he buys both a new window and a new suit. In this scenario, total output is higher because the velocity of money increased (or the demand for money fell).

That being said, it's clear that the shop keeper is worse off. He was planning on having a suit, a window and $750, but instead has the two items and only $500. While the glass maker was made better off, if/when the shopkeeper wants to rebuild his money balances, he'll need to cut out a future $250 purchase, and whoever would have been on the selling end of that transaction will end up being worse off, offsetting the gain to the glass maker, and leaving the shopkeeper poorer.

In the end, even under the broken window story you can see a short-term boost to output and employment, even if the net result at the end of the day was a loss of wealth.

Outside of the broken window argument, it is also possible that the government uses the money in a way that generates a higher return than the private use, which would also stimulate the economy (more so in the long run). An example might be instituting a sales tax in order to fund a new road. If the new road is very useful for private business, then perhaps the ROI on the road more than offsets the deadweight loss in the retail sector. Or the sales tax could be used to fund fighter aircraft so that if a war occurs business activity isn't disrupted by enemy bombing campaigns.

Posted by: justin84 | February 18, 2010 1:22 PM | Report abuse

It didn't cost $800 billion for the $2.5 billion jobs.

That $800 billion in alternative energy, infrastructure, education, etc. may easily make the country far more than $800 billion in future wealth.

Thus, the cost per job could easily be zero or highly negative. We get the millions of jobs and it makes us wealthier in the future. Like any high return projects it's a big net win.

Contrast this with Republican tax cuts for the rich which studies have shown create less jobs per dollar, and leave us with Rolex watches and yachts instead of education, basic scientific research, and alternative energy.

For more on this see:

http://economistsview.typepad.com/economistsview/2008/08/tax-cuts-and-go.html

Posted by: RichardHSerlin | February 18, 2010 11:03 PM | Report abuse

It is very odd that your correspondent counts a tax cut as a cost to him "the buyer/taxpayer?"

I'd say the costs of tax cuts to the average person are two
1) The illusion of wealth distorts consumption savings decisions -- people perceive government debt to be net wealth so it causes them to spend more. Unless we are in a liquidity trap, this crowds out investment. However, we are in a liquidity trap. Economic benefits from the tax cut are gravy. If one had to cut taxes by 1 million per job, crowding out would not mean it is a bad idea, because we are in a liquidity trap and government spending and private consumption doesn't crowd anything out.

2) the dead weight losses due to taxes are convex in tax rates so taxes should be smoothed. This convexity is totally minor for changes on the order of 800 dollars down now and 40 dollar more forever (I'm assuming that the treasury pays 5% real even though it really pays less)

Now a tax cut which is good on average can be bad because of the distributional effects. One might oppose the Obama tax cut because future tax increases will not be flat in income (then decreasing). That is, if one loves inequality, one might consider the cost of a job produced by $ 1 million the Obama tax cut to be significantly positive.

Clearly people who think that inequality is a very very good thing shouldn't like the Obama tax cut. However, people who think that inequality is good but not important should love it.

Posted by: rjw88 | February 19, 2010 11:00 AM | Report abuse

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