Von Aldo

Is the Government's "Jobs Stimulus" Actually Working?

I have never understood the concept of the fiscal multiplier effect, wherein the government takes money out of the private economy and then disperses to fund, say, fixing roads and other infrastructure projects. Advocates say that is "creates jobs." How can that be? Really, it's a zero sum game --- just confiscating money by the government to fund pet projects that could be spent or invested by private people, probably in a more efficient manner. As George Will said in a column last week:

“Last Feb. 24, when unemployment was 8.2 percent, Obama said in the second sentence of his speech to Congress that the economy ‘is a concern that rises above all others’ and later that his agenda ‘begins with jobs.’ After 11 months of health care momomania, he said [last] Wednesday that ‘jobs must be our No. 1 focus.’ Unemployment is 10 percent [now].

“He called Wednesday [during his State of the Union speech] for a third stimulus (the first was his predecessor’s, in February 2008) although the S-word [stimulus] has been banished in favor of [a] ‘jobs bill.’ It will inject into the economy money that government siphons from the economy, thereby somehow creating jobs. And you thought alchemy was strange.”

In the New York Post today, it was reported that the city of New York “created or saved 27,218 of the 599,108 jobs the White House reported generating nationally in the final three months of 2009 as a result of federal stimulus funds pumped into the crippled economy.” The paper says most of the $5.85 billion allocated to NYC went to schools ($2bn); Medicaid ($1.6bn); other health and social-service needs ($963m); and infrastructure ($899m). Some of the jobs “created,” says the Post were part-timers in the city’s “summer youth employment program.” Actually the 19,518 part-timers jobs created equal 2,882 “full-time” jobs. I don't know. That description doens't impress me; it doesn't sound like the money spent will create sustainable jobs for the long haul.

Why not keep the money in the private economy and let it get allocated to where people think it should go to best suit their own needs and goals? After all, tax cuts are a proven way to stimulate the economy (it's the other way besides government spending to increase aggregate demand.) The U.S. has one of the highest corporate tax rates (at 35 percent) in the world. Why not slash that rate permanently (since temporary tax breaks don’t really inspire investment, mostly just hoarding since the tax will just come back)? That would be one way to immediately inject money into the economy.

By the way, on January 22, David Rosenberg, the chief economist and strategist for Toronto-based Gluskin Sheff, wrote this about health care reform: “Just as the focus on health-care reform (as laudable a goal as that is) ended up freezing activity in the small business sector, which represent two-thirds of the employment pie, creating a heightened sense of uncertainty in the financial space, which at this time, is only going to stand further in the way of creating jobs. . . . Bashing the banks at this time is not very likely going to do much except perpetuate this very high level of uncertainty in the business sector and post another roadblock on the way to better times in the labor market.” Rosenberg noted that hiring to staff the coming census, while coming at a good time, “are hardly full-time positions and not exactly part of any long-term strategy to stimulate employment and retool the swelling ranks of the unemployed.”

I recommend Amity Shlaes new book, The Forgotten Man, for more on how uncertainty caused by FDR's government programs, taxes and regulation dampen economic activity during the Depression.

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