Economics

3 Fallacies in Obama's Public-Sector Stimulus Strategy

Paying people to do busy work won't revive the U.S. economy.

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Poor President Obama. Life under the White House klieg lights must seem soooo unfair. Senate Majority Leader Harry Reid has been saying since last year that although "private-sector jobs have been doing just fine," public-sector jobs need help with another $35 billion in stimulus spending, without raising an eyebrow. But the president regurgitates the same line and all hell breaks loose: The blogosphere chortles mercilessly; Twitter chatter roundly lampoons him; and Mitt "I Like Being Able to Fire People" Romney accuses him of being out of touch with ordinary Americans.

Truth is, though, that Obama was asking for it. His statement might be conventional wisdom in his party's circles. But it nonetheless manages to pack in virtually every "progressive" economic fallacy—and then some.

For starters, his claim that private-sector job growth is hunky-dory is hooey. It is true that private companies have added 4.3 million jobs since February 2010. However, this represents a 2.8 percent rate of job growth compared to the 8 percent average after previous recoveries—despite (or perhaps because of) $800 billion in stimulus spending.

But instead of asking whether the effects of his own policies—like uncertainty over the extension of the Bush tax cuts and the compliance costs of ObamaCare—might be choking the private sector, Obama wants to apply his stimulus therapy to the public sector. This won't produce overall growth. Indeed, more government spending means a shrinking private sector, and there are three main reasons why.

One. Obama's talk of a public-sector stimulus is guided by the Keynesian conviction that what's necessary to restore overall economic growth is large aggregate demand. If local governments are handed money to hire more public workers—teachers, cops, librarians, social workers—these people will consume more goods and services, which will stimulate other industries. Every dollar pumped into their pockets will magically multiply into several more.

It's a neat theory—but fanciful.

If boosting aggregate demand is what's needed, why bother creating jobs? Uncle Sam can simply send every unemployed person a generous check with the proviso that it can't be saved. It must be spent on TVs, cars, dresses, and shoes (that'll get the female vote). Call it the  "Stay at Home and Pamper Yourself" economic recovery plan.

Obviously, this would be absurd. But is paying people to do governmental busy-work any less absurd than paying them to do no work? No.

Every (unsubsidized) job in the private sector exists because it generates more in wealth or value than it consumes in resources—and hence grows the economic pie. That's not the case with the public sector.

For example, between 1970 and 2010, public school enrollment went up by 8.5 percent—while public-school employee rolls swelled a mind-boggling 96.2 percent. This cost the country $210 billion and failed to produce one iota of improvement in student achievement. Was this money well-spent because the teachers who received it could spring for nice houses and vacations? Or was it a waste of precious resources that could have been better deployed elsewhere?

Since public-sector jobs don't pay for themselves, they have to be financed either through taxes or borrowing or inflation (printing money), all of which divert resources from productive private endeavors and hurt overall growth.

Two. But suppose that "free" money appeared like manna from heaven to finance the stimulus spending Obama craves. Then boosting aggregate demand would complement private-sector activity and boost overall growth, right? Wrong.

Harvard Business School researchers Lauren Cohen, Joshua Coval, and Christopher Malloy published a fascinating study last year examining the impact on a state's economy after its senators or representatives secured powerful committee appointments on Capitol Hill and sent home more federal funds through earmarks, transfers, and government contracts.

They found that this money produced not private-sector growth but retrenchment. Indeed, in every state, virtually every affected firm—large and small—cut payroll, investment, and other expenses. Why? As publicly funded enterprises grew, they crowded out demand and resources from private ones.

Coval's advice in the wake of his finding? "[Policymakers] should revisit their belief that federal spending can stimulate private economic development." Amen!

Three. The public sector doesn't just indirectly crowd out private job growth but directly clobbers it as well. That, in fact, is why the regulatory state—the main public-sector enterprise—exists. You can argue that its key products (red tape and mandates) are necessary for public safety, but you can't argue that they lead to job growth. As the regulatory state grows, the private economy shrinks—and that's exactly what's been happening on President Obama's watch.

Investor's Business Daily writer John Merline points out that since the post-2008 stimulus, the combined budget of America's regulatory agencies has grown a healthy 16 percent, topping $54 billion. The overall economy? A paltry 5 percent. Employment at federal regulatory agencies has climbed 13 percent since Obama took office. By contrast, employment shrank by 5.6 percent in the private sector.

Can anyone seriously argue that handing more stimulus funds to more regulatory agencies—something that would inevitably happen given that money is fungible—to hire more bureaucrats to write more regulations will mean more net job growth?

That President Obama can't see this and naively preaches the stimulus gospel speaks volumes about the liberal bubble that he inhabits. A little ridicule—even by Mitt Romney—is just what he needs.

Shikha Dalmia is a Reason Foundation senior analyst and a columnist at The Daily, where this column originally appeared.