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State and Local Government / Transparency

That’s Not Gonna Be Good for Business; That’s Not Gonna Be Good for Anybody

By John Payne on Dec 6, 2010

Daniel Wilson of the San Francisco Federal Reserve has released a new study analyzing the effects of the federal stimulus program, which is helpfully summarized over at e21:

A new study by Daniel Wilson at the San Francisco Fed calls into question the idea that the stimulus legislation as a whole — including the state transfers and direct spending portion — failed to generate the promised improvements in employment.

It is difficult to properly calculate the effects of the 2009 ARRA bill, as it was a nation-wide program. Though employment and growth failed to respond to ARRA as the Administration had suggested, fiscal stimulus advocates have argued that employment levels would have been lower still without the program.

Wilson’s study makes an important contribution to this debate by focusing on state-by-state comparisons. A large portion of stimulus funding at the state level was based on criteria that were entirely independent of the economic situation that states faced. For example, the number of existing highway miles was used to calculate additional transportation spending.

The study uses this resulting variation in state-level stimulus funding to determine what impact ARRA funding had on employment — including both the direct impact of workers hired to complete planned projects, as well as any broader spillover effects resulting from greater government spending. Administration economists have repeatedly emphasized the importance of this indirect employment growth in driving economic recovery.

The results suggest that though the program did result in 2 million jobs “created or saved” by March 2010, net job creation was statistically indistinguishable from zero by August of this year. Taken at face value, this would suggest that the stimulus program (with an overall cost of $814 billion) worked only to generate temporary jobs at a cost of over $400,000 per worker. Even if the stimulus had in fact generated this level of employment as a durable outcome, it would still have been an extremely expensive way to generate employment.

In other words, a few people benefited in the short run, but as a society, we are all poorer for it over time. In February, I argued that stimulus proponents who looked only at the benefits of the federal dollars completely ignored the cost side of the equation, and if this study is accurate, I understand why they might shy away from a balanced look at the program’s effects.

(Link via Hit and Run. Headline reference here.)

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John Payne

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