Monday, February 1, 2010

Some 600,000 jobs tied to Obama stimulus plan in 4Q

Reuter's article titled "Some 600,000 jobs tied to Obama stimulus plan in 4Q" (January 31st, 2010) reports improvements in the job-generation counting mechanism of the stimulus plan, but neglects to mention those jobs that this government has taken away from future generations:
That would mean a total of a little more than 1.2 million jobs were created or saved in 2009, versus the Council's forecast of 1.5 million to 2 million jobs, though comparisons are difficult.
Comparisons are made even more difficult by the deadweight loss associated with any subsidy. In the picture below, the deadweight loss in the job market is given by the red shaded area (click here to enlarge).

It is important to specify that the government has taken money from people to "create" jobs, redistributed it, and claimed victory, likely at the cost of future jobs. If the government had not decided to push forward with a stimulus, the money they no longer needed could be re-invested by consumers in more productive activities--hopefully, in spending that does not generate deadweight loss. Natural investments, which spur industrial growth, may create many more jobs in the future than the government has burdened tax-payers with now.

It is also important to note, as Kevin Murphy has, that the effect of government spending depends largely on how efficient the government is at employing the resources it has. If we believe that the government is largely inefficient (so for every tax dollar it raises, it entirely wastes fifty cents), this makes it more likely that the net value of the stimulus is negative. If we notice that the stimulus plan is not devoted to making use of "idle" resources, but rather to transferring funds from productive taxpayers to less productive citizens, this also makes it more likely that the net value of the stimulus is negative. Finally, if we believe that even "idle" resources, such as the unemployed, are able to become productive with relative ease, such as by taking a college course or moving, the case that the stimulus has net negative value becomes quite compelling.


  1. Moreover the government spending itself is not without consequences. Businessmen watching the complete loss of federal spending discipline and anticipating a tsunami of future taxes and inevitable hyperinflation as a result may well decide not to invest in expanding their businesses to an extent that eliminates any advantage from the "employment" generated with unbacked printed money. Certainly anybody who thinks about what a burden this debt will be once interest rates move to normal levels has to have a tad bit of concern.

  2. The connection you make between high taxes now and hyperinflation later is not clear to Corrections. In Correction's view, to quote Milton Friedman, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Absent tax increases so distortionary to be on the right side of the Laffer Curve (which no government attempting to raise revenues to pay debts should or would price on) Corrections does not see a drop in output necessary to produce hyperinflation. A 20% drop in productivity would not be close to enough.

    We agree, however, with your main point, Student1776, that businessmen will react now to future price increases. If previously they could reap entrepreneurial profits from starting a business now, and future expected tax increases eradicate those rents, then they will not start a business.

    Indeed, our recent article "How Not to Write a Jobs Bill" (February 12th, 2010) offers Harald Uhlig's result from a neoclassical growth model with endogenous labor ("Some Fiscal Calculus, Working Paper), that contends a discounted $2.6 is lost in the long run for every dollar the government spends in stimulus, while tax cuts on labor offer up a gain $1.7 for every dollar spent.