Use the Tiny Tiles—And Other Tales from the Stimulus

Stimulus theory vs. stimulus reality


Here's how fiscal stimulus is supposed to work: The federal government injects a few hundred billion dollars into a sluggish economy through federal spending. That spending sparks additional consumer demand. And that additional demand drives new economic activity that results in a multiplier effect, in which a dollar of initial government spending creates more than a dollar of economic activity, spurring economic growth and job creation. 

That was the basic stimulus theory, as explained by Lawrence Summers, who chairs President Obama's National Economic Council, at the tail end of 2008. The story was convincing enough: In 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA)—an $830 billion stimulus package—into law, promising "unprecedented transparency" in tracking how the money would be used and how many jobs it would create.  

So how did the stimulus work in practice? Daniel Rothschild, a former researcher at George Mason University's Mercatus Center who now works for the American Enterprise Institute, wanted to find out. Working with Mercatus Center economist Garett Jones between August and November of last year, he oversaw 50 hours of interviews with businesses and contractors that received and applied for stimulus funding. And what he found was that the on-the-ground reality of the stimulus was far messier than the simple theory behind it.

In his initial report, Rothschild relays an illustrative story about a contractor with 25 years of construction experience, much of it laying tile in government buildings. Heading into an otherwise typical job that he expected to account for about two percent of his annual income, the tile-layer made plans to install standard blocks of four-inch white tiles—the same tiles he usually installed, the same tiles found in other parts of the same office complex, and the exact materials called for in the architectural plans.

Then he got updated specs. The large white tiles were out. Tiny, colored tiles that needed to be laid in an intricate pattern were in. Did it matter that the smaller tiles would cost the government 50 percent more than the larger white tiles? Not at all. In fact, the higher cost may have been the point. The tile-layer told Rothschild's interview team that "the only reason he could see for using the smaller tiles was to move the money out the door on the ARRA schedule." So in exchange for their stimulus dollars, taxpayers got a government building with fancier floor tiling. 

At other times, they got even less. Rothschild tells another story of a truck salesman who placed a stimulus-funded order for an expensive big-rig. Delivery times on those vehicles range from six to nine months. But stimulus recipients are required to report how many jobs they've created every three months. "There was no work that he had actually generated. He was just a salesman," says Rothschild. And the lag complicated the reporting process as well. "There was no real way to report what would be a fairly normal business transaction."

Rothschild's survey results suggest that the law's reporting requirements, despite having been billed as unprecedented transparency measures, often created more confusion than clarity. In some cases, for example, firms that received stimulus money were instructed by their federal overseers to count jobs created by taking the total amount of money they were given, divide it by some predetermined per-job salary figure, then report the result as the number of jobs created.

Essentially, they were told to assume in their reports that if they got the money, they created jobs—regardless of whether or not any jobs were actually created.

Many firms, however, were given no reporting instructions at all, and thus had to figure out how to count jobs created all on their own. That proved particularly challenging for blue-collar contractors. "The things that were much easier to report were the things that government typically contracts for," Rothschild says. "And the things that the government typically contracts for are knowledge and managerial positions—things that require a college degree or higher. The entire expense and reporting system was based around the idea that you're hiring white collar people to do white collar jobs."

Part of the complexity comes from determining exactly what counts as a job created or saved. An ongoing full-time position certainly counts. But what about the temporary work required by most labor-intensive construction projects? Rothschild describes a local housing authority he interviewed that reported creating 25 jobs with stimulus funds. Seven of the jobs, however, were for house painters who worked for just a few weeks. "But they were still reported as being newly created jobs," he says. The reports did not distinguish between short-term project work and long-term new positions. 

Stimulus money also appears to have funded projects that worked at cross-purposes: Rothschild recalls interviewing a manager at a non-profit that trains non-skilled workers to become skilled craftsmen and construction workers. But wasn't the stimulus supposed to help create jobs for the existing construction workers who'd been laid off as the economy slumped? In theory, the stimulus was supposed to solve the problem of too little demand for construction labor. But it also ended up funding projects designed to increase its supply. 

It's clear that the stimulus created some jobs in some instances. But the self-reporting is inconsistent enough that the true number is hard to know with much confidence. And many of the projects that the stimulus funded may have been little more than busywork—like the tiler ordered to lay smaller tiles. 

"Modern economics has become divorced from micro-economic realities," Rothschild says. "Things that don't fit neatly into a model tend to be discarded." But in any system as expansive as the one created by ARRA, there's bound to be an awful lot that doesn't fit the model. Inevitably, then, complications arise. "No matter how well you design something, the micro level details become very difficult," Rothschild says. The way stimulus is supposed to work and the way it does, in other words, are rarely the same.

Peter Suderman is an associate editor at Reason magazine.

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  1. My stimulus anecdote:

    So, I live in Tucson: if anywhere is in need of an infrastructure revamp, it's here. We have no good main roads, I-10 and I-19 are way to the west, and our intersections suck ass: we only have turn lights on a handful of them, and some of the busiest intersections don't have turn lights. Our city street layout is caught in an abysmal halfway point between being a grid and meandering, cul-de-sac style streets. On top of that, outside the UA area, our roads are bumpy as hell. In short, it's a road system as designed by either White Indian or Somalians.

    So last summer, I saw a sign that says "this improvement has been paid for by the ARRA Act", or something to that effect. Was it a sign extolling a fixed road, a new turn light, or some new road connecting two roads, or a new lane making one of our one-way streets into a two-way? Hell no -- it was a goddamn wheelchair-friendly ramp to a road that led to a fucking old-tyme saloon!! FUUU--

    1. Good example of Gov't waste but the junior economist in me has a problem with the whole infrastructure spending idea. I will admit to knowing almost nothing about Tucson but it looks like its citizens are satisfied with their crappy roads. The majority of the citizens of Tucson, as represented by the city government, chose not to spend money on their infrastructure. They did not see the utility (value) in spending a scarce resource (tax money) on improvements.
      There might be rational reasons why they made the choices they made that I am not aware of. There may be corruption in the city gov't (vote the bastards out) or there is no way to raise the tax revenues (taxes might be too high already) but I would argue it still shows a satisfaction with the way things are now or with apathy toward making any changes (incumbents keep getting reelected).

      1. It's tough to gauge what the demand for public goods really is in a free market (free loader problems and such).

        It's tougher still when government supplants the market, thus making it impossible to tell where the equilibrium would be. It's sort of like teacher pay: it might be higher or lower in the free market, but we'll never really know if
        government dominates that sector.

        Tucson just sucks, though. One of the highest municipal income taxes in the nation (either #2 or #3), most of it spent on enormously stupid things (lots of environmental stuff, bike paths, etc).

        1. But, but...the roadside olive trees!

        2. Dude, at least your wheelchair ramps lead somewhere. Here in OKC they repaved some of the roads. They also installed wheelchair ramps that lead to....nothing. No sidewalks, just wheelchair ramps that lead into dirt. One was even built right next to a hill. The first time it rained the dirt covered the entire thing.

    2. I've never had a particular problem with roads in Tucson. They are no better or worse than other places I've been. Now there are a few intersections here and there without a turn signal that could use one, but I haven't found it particularly egregious.

      1. I moved from Stuttgart, which has a pretty good grid system and turn lights *everywhere*, so I might be spoiled. Still, it seems like no one has particularly good things to say about it whenever the topic comes up in casual conversation (though that might be a "grass is always cleaner" situation).

        1. Well, if you want a grid system...

          It can be a bit confusing when a road just
          stops at a "t" and then picks up a couple of miles further east and north from where it ended with almost no connection to where it ended. Or when a road turns from Ina to Skyline to Sunrise with no discernible division other than a jog to the south and then back to the east.

          But I guess I kind of enjoy that sort of quirkiness. And there are some nice major east-west and north-south roads that you can quickly get around. And I've never noticed roads being particularly more in dis-repair than any where else.

  2. The story was convincing enough:

    Only if you don't ask yourself where the money is coming from, and are unacquainted with the concept of opportunity cost.

    1. It was convincing enough that the stimulus passed!

      1. We had to do something to protect our do-nothing jobs!

      2. Wow! What a challenge.

      3. Barack had us at hello.

        1. That raises a good point: The Democrats in Congress really sucked ass in a historical way, beginning in 2006. While history may look back at Obama as one of America's worst presidents, let us not forget that Congress.

          And Republicans! No pass for your bad works during the beginning of the century, nor should you get any ideas about your upcoming reign in 2013. Behave, or we'll turn to rule by Roomba.

          1. I, for one, welcome our new meandering, vacuuming masters.

            1. While they do, in fact, suck, they suck less than the politicians we've been getting.

              1. And, they have the cat vote down pat.

                Truly, free riders, if ever there is one.

                1. Maybe not. I understand that the laser pointers have a majority of the cat vote locked up.

          2. Behave, or we'll turn to rule by Roomba.

            That brought to mind the scene in Spaceballs with the giant 'maid' vacuuming the atmosphere of some planet.

  3. Listening to NPR last night discussing Rick Perry's claim that the stimulus didn't create any jobs.

    Being NPR, I'm not surprised that they would do a 'fact check' segment against a republican who makes specific claims.

    I just wish NPR would do the same for Obama's claim that he is creating or saving 300,000,000,000,000.9864738900183759 jobs.

    Yes, NPR, I'm sure the stimulus "created" a job here and there. Thanks for your in-depth analysis.

    A more fair segment would have focussed on the whole issue of jobs created in the stimulus in general and asked why politicians are full of shit when they claim they're creating millions of jobs.

    I know, the infamous and effectively unfalsifiable "Multipliers!11!!11one!"

    1. One thing about the stimulus--how many of the funded projects were rightfully passed over when they attempted to get funding before?

      I leave aside for the moment the politics used in rewarding stimulus dollars, the fact that we couldn't afford the stimulus, and the economic stupidity of the idea in the first place.

    2. maybe NPR could do a hit piece on the idea of "unprecedented transparency" and how that equates with "We have to pass the bill so you can find out whats in the bill."
      also, just where did the funding come from to do this study?

  4. "Did it matter that the smaller tiles would cost the government 50 percent more than the larger white tiles? Not at all. In fact, the higher cost may have been the point."

    Those aren't "shovel-ready" projects. They're "teaspoon-ready" projects!

  5. "The story was convincing enough: In 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA)?an $830 billion stimulus package?into law, promising "unprecedented transparency" in tracking how the money would be used and how many jobs it would create."
    You mean a sack of shit with big ears fell for it?

  6. bullshit

  7. You mean it didn't work?

    1. Oh, it worked. For its intended, unstated purpose.

  8. I just loved this one http://politicalticker.blogs.c.....=allsearch
    where CNN "fact checked" Perry's statement that it created zero jobs. While I don't doubt that it created some jobs, where did they go to get "A more accurate jobs count"? To the Congressional Budget Office who's own director admitted that their estimate was based on the same models that predicted the stimulus' effect and that actual underperformance would fail to show in their jobs count. Way to go CNN.

    1. So they used the predicted amount as the counted amount?
      Wonder if I could make the IRS accept numbers like that?

    2. The science is settled, damn it! How dare you question us.

      1. Yeah, they work for AGW.

    3. You've gotta wonder: Does anyone actually believe this bullshit? Its so transparent and obvious, why are they even throwing it out there?

      1. Some people buy it, including the media, which tries really hard to get other people to buy it.

        1. The media need *something* to report and the easiest way to get it is to ask government representatives. Win/win for media and government. Now so much for public truth and accuracy.

      2. Everyone I know, apart from my wife, believes it.

  9. "The federal government injects a few hundred billion dollars into a sluggish economy through federal spending. That spending sparks additional consumer demand."

    Demand for what?

    And how could government spending possibly trigger that demand?

    Why do these people not even ask basic logical questions??

    1. Cut spending, reduce the deficit, and let us keep much more of our money. Reduce the regulatory burden, too, and I guarantee a boom like we haven't seen in some time.

    2. Well, see, its like this.

      Government creates money out of thin air. It then spends that money on, well, it doesn't matter.

      Eventually that money gets to a consumer. Who spends it.

      Thus, consumer demand is created! Out of thin air!

      And the whole "multiplier" kerfuffle is just meaningless. Before the government created the money, it didn't exist, it was nothing. So its literally pointless to ask what the multiplier is.

      1. Ah, I see. Multiplying zero by any number equals zero. Strange that none of the government's economists have explained this.

        1. This is advanced math in today's world

      2. Actually, I think the multiplier is infinite. You're getting something for nothing here, right? And something is infinitely more than nothing, isn't it?

        They're just being modest. As public servants are wont to do.

  10. That spending sparks additional consumer demand.

    I'm shopping for a new pitchfork, so maybe it worked.

  11. I wouldn't pitch your old fork just yet.

  12. Hopefully we all know all this government hype is BULLSHIT!!!!time to do something about it. Talk is cheap

  13. Govt taxing for non-property rights protection purposes, such as "Stimulus", amounts to breaking windows in order to fix them. it's a guaranteed waste of taxpayer $ and no better than intentionally creating a disaster. Big govt has the economic effect of a hurricane making machine.


    1. In a growing economy, at say 10% per annum, Producers can take $1 and create $1.10 of value, keeping 10c of profit.

    2. If the producer keeps the 10c, he will be taxed at 35%, and have to pay 3.5c.

    3. If he reinvests the 10c into the biz, pays investors their dividends, he will pay no tax, but he will expand his production rate, or increase his profit, or add new products, or add new jobs, all growing the economy more.

    4. But if Stimulus takes everyone's 3.5c and buys products/services that are not demanded naturally, producers get a false demand signal, and will increase capacity beyond the natural demand for it. This is a form of price control, and it always results in surplus or shortage, which is inefficient.

    5. This amounts to a net loss of growth potential, because the 3.5c confiscated is wasted relative to if the producer was allowed to keep it.

    6. The best govt use of the 3.5c is to protect property rights with its monopoly on violence-secured legal arbitration, which is the natural role of govt. Without this security and enforcement of rule of law, trade is deterred, therefore govt use of the 3.5c for rights security is justified and enables growth.

    7. Any other use of the 3.5c by govt is wasted because it cannot have sufficient micro-econ knowledge to intervene in transactions in a complex economy. It is only when transacting parties appeal to govt for arbitration of trade or proprty damage claims that govt action is growth-enabling.

    Count Dracula Keynes keeps rising to suck our blood, and sickening and killing parts of our economy. It is time we put a stake through his fake bleeding heart.

  14. many of those ARRA signs around here already have bullet holes in them. This re-investment act didnt really create private sector jobs. jobs created with tax dollars are a net negative and mostly short term at that

    1. the gun industry is happy...

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    1. this sounds legit.

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    1. Can I apply for stimulus funds so I'm appropriately stimulated for the encounter with a cougar?

  17. The problem isn't just that the grand theory failed to take the practical details and difficulties into account (although no doubt that happened); the problem is that the grand theory is totally mistaken. If economic literacy prevailed, a gang of politicians could not have gotten away with wasting borrowed money, and calling it stimulus.

    John Maynard Keyned was wrong, and Henry George was essentially right about what causes recessions, and how to end unemployment. Pass it on!

  18. I nominate Lawrence Summers to the Washington D.C. Players Hall of Fame. Thank you Lawrence.

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