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Fed Study - Stimulus Spending Created No Jobs

By Da King Published: December 12, 2010

I have argued repeatedly that the problem with President Obama's 2009 stimulus package (ARRA) was that it borrowed $814 billion to create a bunch of temporary jobs. When those temp jobs ended, America would be left with no net job creation, along with a huge bill for the taxpayers, making Obama's stimulus a huge negative economic event overall.

The Federal Reserve Bank Of San Francisco recently completed a study of the stimulus package, which analyzes the effects of the spending portion of the stimulus package on job creation. It does not address the tax cut portion of the stimulus. Here is the Fed's conclusion:

This paper analyzed the employment impacts of fiscal stimulus spending, using statelevel data from the American Recovery and Reinvestment Act (ARRA) enacted in February 2009. Cross-state IV/GMM results imply that ARRA spending created or saved about 2.0
million jobs, or 1.5% of pre-ARRA employment, in the total nonfarm sector by early 2010. However, the results indicate that many of these ARRA-generated jobs were short-lived, as the estimated employment impact fell to just 0.8 million (0.6% of pre-ARRA employment) by June 2010 and to essentially zero by August 2010. This pattern in ARRA spending’s impact over time is also seen in the reduced-form relationship between post-February employment change, conditional on the control variables, and either instrument. Furthermore, the pattern is unique to the post-February 2009 pattern of employment change; it is not seen in post-February employment change for prior years.

In addition to this change over time, I also find substantially heterogeneity in the ARRA’s employment impact across sectors, and across types of spending. The impact on construction employment was especially large: a 23% increase in employment (as of August 2010) relative to what it would have been in absence of ARRA spending. Across different types of spending, the results suggest that infrastructure and other general spending have large, positive multipliers while “strings-attached” aid to state governments for Medicaid reimbursement may actually reduce state and local government employment. Lastly, I find that ARRA spending appears to have increased both jobs gains (from opening/expanding businesses) and job losses (from closing/contracting businesses).

No net job creation.

In another part of the study, the author says the long-term affects of the stimulus package will cause employment to be lower than it would have been without the stimulus, due to the stimulus package's negative fiscal multiplier (no lasting job creation plus lasting debt).

We can call the short-term stimulative effect of policies like the stimulus package the Cash For Clunkers Syndrome. Cash For Clunkers caused a spike in car sales while the program was in effect, but as soon as the program ended, car sales plummeted, meaning the net car sales from the program were ultimately zero. All that was left at the end of the day was the bill for the taxpayers to foot.

In other words, Keynesian economic theory doesn't work over the longer term, unless the government money spent leads to lasting economic growth (i.e., the creation of new industries or technologies). The stimulus package overwhelmingly did not do that, meaning it was an enormous waste of money. In the few cases where the stimulus spending might lead to permanent job creation (maybe in green energy ???), the $400,000 per job investment is still not a very efficient usage of capital.

It's far better to just cut taxes permanently, putting more money to spend in people's pockets permanently, and to reign in government spending. Contrary to the delusions of liberals, we don't have huge deficits because Bush cut taxes by 10%. We have huge deficits because government spending more than doubled over the last decade. In 2000, federal spending was $1.7 trillion. In 2010, it's $3.7 trillion. It doesn't take a rocket scientist to figure out spending is the problem, even if liberals want us to believe the enormous lie that the Bush "tax cuts for the rich" are the culprit. Everyone from the first grade upward should know better, even if liberals don't.



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