Did the Stimulus Work?

A set of political ads in current circulation says that the stimulus did not create any jobs. Fact checking sites have ruled this false. Who is right and how successful was the stimulus?

By the White House's own standard the stimulus was a failure. We were promised that it would keep unemployment below 8%. Instead it topped 10%. The answer for that is that the economy was much worse than the White House financial team projected and the unemployment rate would have been even worse without it. This means that we do not have any usable projections on the economy with and without the stimulus. It gets even more complicated because the White House uses "jobs created or saved."

The fact checking sites are relying on the Congressional Budget Office (CBO) which in turn is relying on formulas that say that X amount of spending will create Y jobs. (The actual formula says that X amount of spending will create between Y and Z jobs and the White House used the Z figure.) An early effort to track actual jobs created was abandoned after it failed to match expectations.

I have a little personal experience with this. We received a large grant - millions - to spend on WiFi. This will only create two direct jobs and we did not want to report that so we decided to use one of these formulas on the idea that anytime millions are spent, someone is going to get a job out of it somewhere.

In order to get a better idea of how the stimulus worked we will have to look into its parts. A large portion of the stimulus consisted of an extension to unemployment benefits. A second part amounted to a bailout of states and cities that were left cash-starved by the drop in tax revenue. This did not create any new spending so, at best, these portions saved jobs but did not create any. Even figuring a multiplier effect we are only talking about a multiplier of jobs saved.

Another part was the "Making Work Pay" act. This combined two aspects of the Obama administration - a tax cut for the poor (it started phasing out for people making more than $75,000/year) and social engineering. It amounted to a $400/year tax credit to be spread across the year. The idea was that the amount people actually saw would be too small to bother saving so they would spend it. This did not work. No one has been able to correlate an increase in consumer spending with Making work Pay. Since so many people now use direct deposit it is likely that extra money stays in the account increasing the savings rate instead of the spending rate - just the opposite of what was planned.

Cash for Clunkers is often billed as the big success story of the stimulus. This gave people tax credits for trading their current car in on a new one with better millage. While it caused a big spike in car sales during the Summer of 2009, the big picture tells a different story. Most of these car sales were to people who would have bought a new car within the next year, anyway. This did not create sales, it just moved them forward. No net job creation. Granted, some people got employment scrapping the "clunkers" but the effect of taking so many cars out of the used car market was an average price increase of $1,800 on the remaining cars. This has to have depressed the used car market.

The most visible portion of the stimulus was "shovel-ready" construction jobs. There were problems with that, also. Most construction jobs take years to plan. The work the Stimulus paid for was either jobs that were already planned that were accelerated or simple, quick jobs like repaving. The big jobs would have been done anyway. The little jobs were so short-term that they would not be likely to affect long-term consumer spending (i.e. Will a two-week job spreading asphalt make you buy a new car or will you simply pay down existing debt?).

The final portion of the stimulus went for pet projects like green energy. This may have created jobs but they are jobs that can only continue with government subsidies.

So, where does that leave us? Some of the money was wasted outright. Some of it may have been counter-productive. While it is true that amounts of that size must have created some jobs, somewhere, it is also a stretch to say that this made the difference between a recession and a depression. The whole point of the stimulus was to provide more bang for the buck than we got with Bush's tax rebate. By that measure then the stimulus must be judged a failure.