The Corner

A New Stimulus?

There’s no question that President Obama inherited an economy in really bad shape. However, many prominent Democrats, including Senate Majority Whip Dick Durbin and DNC chair Debbie Wasserman Schultz, acknowledge that two and a half years into his first term, the president now owns the economy. Unfortunately for him, the economy isn’t doing well. That’s why the president last week called on Congress to pass a series of spending measures that he said would boost the economy, including more 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.

This chart is based on the most recent data from the Bureau of Labor Statistics and the Center for Data Analysis. The administration’s promise that the ARRA bill 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 again, even though $382 billion has been made available by government departments and agencies (on top the tax credits and other tax-related items). In fact, unemployment has 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 would help the economy. Paul Krugman, however, disagrees and argues that these results are the product of a stimulus that was too small. I am not sure what stimulus would be large enough for Mr. Krugman. What we know for sure is that so far we have spent $666 billion (which adds much to our debt) yet unemployment  remains above 9 percent, and that even under the rosiest of assumptions (2.4 million jobs created), each of these jobs cost $278,000 (see here).

Stanford University’s John Taylor argues that the stimulus failed because, although much money was spent, very little money was spent in the form of actual government purchase. In a paper with John Cogan, he finds that, out of the total $682 billion package, federal infrastructure spending was $0.9 billion in 2009 and $1.5 billion through the first half of 2010 — that’s less than four-tenths of one percent. The tax-cut money was saved, and the money that went to the states was mainly used to reduce their reliance on borrowing and other “non-purchase” items (transfer payments, subsidies, and interest payments). So, basically, more money going to the states and going to taxpayers in the form of tax credits wouldn’t change a thing.

Sustainable job creation comes from the private sector; true stimulus legislation is that which creates a stable, low-regulatory regime that will enable businesses to hire workers in sustainable jobs, jobs that will last long after stimulus funds have run out.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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