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The Spectacle Blog
In early 2008, with the economy beginning to slow down, Larry Summers famously laid out three criteria for any fiscal stimulus: it should be “timely, targeted and temporary.” Targeted, meaning that the funds should flow to “those with low incomes and those whose incomes have recently fallen for whom spending is most urgent,” i.e. low-income and, especially, unemployed people. If these three conditions weren’t met, Summers warned, the stimulus coud “have worse side effects than the disease that is to be cured.”
A pair of studies performed by Garett Jones (who has been featured in the Spectator in the past) and Daniel Rothschild of the Mercatus Center provide new, concrete evidence that the spending in the 2009 stimulus bill was not targeted, and created few jobs. Jones and Rothschild simply surveyed and interviewed organizations that received stimulus funds, and found that fewer than half the workers hired by those companies were previously unemployed. Almost half of them were hired away from other companies. In other words, far from employing unused resources, the stimulus crowded out other areas of the labor market.
One reason these results reflect poorly on the stimulus is that the purpose of the bill was to help mitigate the harmful effects of mass unemployment in the short term. When President Obama introduced the American Recovery and Reinvestment Act, the Congressional Budget Office estimated, using models similar to the administration’s, that the bill would increase output and employment in the short term, but hurt the economy in the longer run. Specifically, the CBO projected that ARRA would slightly decrease GDP overall by the end of 2014, relative to the no-stimulus baseline. In other words, the administration decided it would be worthwhile to sacrifice a tiny bit of long-run growth to alleviate the near-term suffering of the unemployed.
Unfortunately, the Jones and Rothschild studies provide evidence that spending measures in the stimulus bill did not work in the way that the administration thought they would (other parts of ARRA might well have, such as the tax cuts). The basic Keynesian idea behind the administration’s thinking was that, when aggregate demand collapsed, productive workers and companies became needlessly unemployed. Government spending could replace private spending, and prevent them from remaining idle for a long time, thereby creating a free lunch — gainful employment for the workers, and increased aggregate demand for the whole economy.
The fact that organizations receiving stimulus funds hired more workers away from other firms than they did from unemployment suggests that the spending did little to put underutilized resources to work — as would happen in the administration’s Keynesian model. As Jones and Rothschild note, the proportion of hires that were previously unemployed roughly matches the proportion that obtains during normal economic times. Under Keynesian assumptions, that should not be the case: the presence of idle but productive workers during the recession should have made it easier for the companies receiving stimulus funds to hire directly from the ranks of the unemployed. As Jones and Rothschild write, “In other words, we find little evidence that stimulus spending was particularly effective at moving the unemployed into work. During the worst recession in generations, the ARRA-receiving organizations in our sample hired away employed workers at roughly the same rate as in normal economic times.”
The authors also anticipated one question about the high number of workers hired from other firms, namely that their jobs might have been filled by unemployed workers (The New Republic’s Jonathan Chait, apparently without having read the paper, makes that exact criticism). Jones and Rothschild note that, in that case, the stimulus would fail Summers’s “timely” criterion, as firms cannot quickly find skilled workers — “the process of hiring good workers takes time, and that eats up the short time wherein free-lunch Keynesianism can work.” Furthermore, they write,
if, as is the case of the construction engineering firm discussed above, only a third of a company’s new hires come from unemployment, then it is quite a lot to hope that some other firm will actually hire the unemployed.
Moreover, job switching is not costless. When companies lose workers to stimulus-funded firms, they lose valuable skills and experience, what economists call -organizational capital.‖ So when a mid-level manager who understands the company’s database program switches jobs, or when an engineer with valuable contacts moves to the ARRA-funded engineering firm, the old firm is left weaker.
The surveys also revealed that, by a two-to-one margin, funds went to organizations that reported that “things had been busy” rather than “things had been slow” prior to receiving the stimulus money. This result provides further evidence that the stimulus did not put unemployed resources to work, but rather merely redirected private activity.
These two studies strongly suggest that the stimulus bill was poorly targeted, and that it did little to aid the unemployed or boost aggregate demand. Furthermore, they also indicate it’s impossible for stimulus spending to be targeted very effectively. The government does not have the diffuse knowledge needed to identify firms that would otherwise be needlessly idle and people who need jobs.
View all comments (11) | Leave a comment
More Blog Posts by Joseph Lawler
http://spectator.org/blog/2011/08/31/why-the-stimulus-was-a-bad-ida
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Occam's Tool| 8.31.11 @ 4:49PM
Stimulus didn't solve problem because it was moronic. The same amount of money in tax cuts with a President saying attaboy to Entrepeneurs and doing everything he could to minimize bureaucratic restraints to oil drilling and other boomtime industries would have resulted in a surplus instead of a deficit and a continued triple A rating.
But, if you assume our POTUS is a Left Wing Traitor, his actions make perfect sense.
PattyMor| 8.31.11 @ 5:15PM
Well a big chunk of the Stimulus Money went to the union workforce so that States & Towns could keep them on their payrolls and paying union dues. The union dues are then recycled back into the Democrat Party. Its a match made in Democrat Heaven.
Solo| 9.1.11 @ 8:27AM
*Ding...Ding...ding*!
That is the correct answer!
The so-called "Stimulus" was designed from the very beginning to benefit democrat party cronies at every level.
Much, if not most, of the "Porkulus" money went to States as block grants so that they could firm up the retirement and Health accounts for their massive numbers of unionized public employees.
Gotta keep those union dues flowing back into democrat campaign coffers.
Another large chunk went out as pure pork to democrat districts for pressing projects such as $Millions for the Study of the Pacific Marsh Mouse in California.
What little actually went into the private sector made its way there in the form of Roads and infrastructure projects which are universally staffed by Union Labor workers--in most cases as a state requirement for conducting work for the state.
So, again....the money (your money!) passed straight through the Union thugs and right back into democrat party coffers.
$787 Billion of pure democrat party graft.
The "Stimulus Bill" didn't stimulate anything except the Unions and its proletariat.
And....bear in mind, while you're watching Obammy regurgitate his nonsense before Congress next week, that the "Infrastructure Bank" he will undoubtedly propose is more of the same thing.
George S| 8.31.11 @ 6:53PM
Recession: businesses conserve capital and prioritize. First, they discount inventory to turn it into cash. Not to pay their workers, but to pay the bank (loans for production assets, machinery and real property). The workers are laid off to conserve operating capital in times of low sales.
Recovery: businesses now need to restock their inventory as the economy picks up. Workers are needed and are rehired. When the rehired return, they fins all the equipment right where they left it -- because the bank did not confiscate it during the recession.
Stimulus does nothing to alter or affect the above scenario -- which was the historical standard business cycle up until the Fed started printing funny money. When government spends, it does not necessarily target those businesses that need to deplete inventory, therefore nothing happens. Where the money winds up going is for political benefit instead.
That's why it doesn't work. Studies are a waste of time.
Curtis Rasmussen| 8.31.11 @ 7:34PM
Check out the collapse of Solyndra in California. The company received 535 million! dollars of stimulus funds in 2009 only to shut its doors on August 31st, 2011. Obama the clown visited this facility to tout it as the future of green energy.
If Obama wants to tour your facility, take my advice: barricade the doors. This isn't the first time he's visited a company only to have the doors shutter within 2 years.
LiveFreeOrDie| 8.31.11 @ 8:50PM
Because it was never intended to?
Bob Grant| 8.31.11 @ 10:13PM
Doesn't anyone remember what Obama said shortly after the inauguration?:
The era of boom and bust cycles is over!
That basically told me all I needed to know about this clown. I knew thereafter his economic policy would be one failed stimulus after another.
Gee, I miss those booms!!
Wayne | 9.1.11 @ 12:00PM
It was obvious from the get-go that the Stimulous had no stimulous. But lets no forget that the year before Bush had his own ill-fated stimulus.
ACynic| 9.1.11 @ 12:07PM
the only jobs govt. can create is either by hiring a govt. worker or by directly funding a govt. project where, somehow, they hire mostly the formerly unemployed
That is it.
Business will not hire and folks will not spend when they are nervous, scared or otherwise worried about the future; as we see today.
Massive govt. spending just scares the crap out of everybody because everybody knows the USA is broke and is just printing money (and BORROWING THIS PRINTED MONEY !!) and everybody sees there is simply no way to pay off the massive debt.
This everybody includes Obama and the democrats. So, why are they promoting this scam??
Folks, look at Sweden.
That is their goal. If they impose policies that will bankrupt the USA, they will have a damn good reason to say, we need far higher taxes, a much smaller military, socialized medecine and far greater govt. control over everything.
What they do is intentional, purposeful and grounded in a left-wing, pseudo-Marxist theology.
Wake up folks. They KNOW WHAT THEY ARE DOING !!!!
Louis Woodhill| 9.1.11 @ 12:27PM
It's even worse than you say in your article. Stimulus probably destroyed 3 million jobs, net. This is because of the impact of selling the bonds that funded the stimulus spending. The money did not come out of thin air. The monetary base was relatively constant during the period during which most of the ARRA money was spent.
ys| 10.25.11 @ 10:11PM
Slewing ring : a novel rotary products, also commonly called a slewing bearing slewing bearing, usually by a worm, shell, motor and other components. http://www.1stbearing.com