Myth 1: Stimulus spending can jump start the economy and fix unemployment.
Fact 1: Recent experience suggests stimulus spending won’t help.
There’s no question President Barack Obama inherited a lousy economy. Yet even many prominent Democrats, including Senate Majority Whip Dick Durbin and Democratic National Committee chair Debbie Wasserman Schultz, now acknowledge that after two and a half years in office, the president owns the economy. Unfortunately for him, things still aren’t looking so so good. That’s why the president called on Congress last week to pass a series of spending measures that he said would boost the economy, including additional infrastructure spending and an extension of the payroll tax cut for another year.
With this in mind, I thought it would be interesting to update my chart on the level of stimulus spending and unemployment rates since 2009.
The chart is based on the most recent data from the Bureau of Labor Statistics and the Center for Data Analysis. As you can see, the administration’s promise that the American Recovery and Reinvestment Act (ARRA) would keep unemployment rates from reaching 8.8 percent and would create some 3 million jobs—90 percent of them in the private sector—did not materialize.
The unemployment rate started at 7.6 percent when President Obama took office and peaked at 10.2 percent in October 2009. Since the enactment of the stimulus bill in February 2009, the unemployment rate has not approached pre-ARRA levels, even though $382 billion has been made available by government departments and agencies (on top of tax credits and other tax-related items). In fact, unemployment recently edged up, from 9 percent in April to 9.1 percent in May.
Based on this data, it is hard to make the case that doing more of the same will help. Yet that is precisely what New York Times columnist Paul Krugman think we should do. In his view, these dire results are due to a stimulus that was too small. It’s difficult to imagine what level of stimulus spending would be large enough for Krugman. What I do know is that we have spent $666 billion to date, yet unemployment remains above 9 percent. And under even the rosiest of assumptions, which claim 2.4 million jobs created, each of those jobs cost $278,000 (see here).
Myth 2: Additional infrastructure spending is an effective way to stimulate the economy and create jobs.
Fact 2: In theory, infrastructure spending injects more money into the economy than other types of government spending. In reality, however, politicians rarely include infrastructure spending in stimulus bills. Instead, they spend money on items like transfers and tax cuts. Only 3 percent of the last stimulus went to infrastructure.
Economists on both sides of the aisles argue that one reason why the stimulus failed is that it wasn’t designed properly. Stanford University’s John Taylor, for instance, has argued that although much money was spent, very little stimulus money was spent in the form of actual government purchase. In a paper with he co-authored with John Cogan, Taylor finds that, out of the total $682 billion package, federal infrastructure spending was just $0.9 billion in 2009 and $1.5 billion through the first half of 2010—or less than four-tenths of 1 percent.
Taylor and Cogan also noted that most of the money generated by tax cuts was saved, not spent, and that the money that went to state governments was spent to reduce the states’ reliance on borrowing and on other “non-purchase” items, such as transfer payments, subsidies, and interest payments. In other words, the additional money that went to states and taxpayers didn’t change a thing. Taylor claims that a better-designed stimulus would have probably been more effective.