Those dissecting the White House claim that the $200 billion spent on the stimulus has created or saved 650,000 jobs have focused on the arithmetical errors in counting the hirings. They are ignoring a much more fundamental issue. Before Congress could inject $200 billion into the economy, they had to borrow $200 billion out of the economy. So the more central question is thus: If injecting $200 billion into the economy supported 650,000 jobs, then how many jobs were lost by first borrowing that $200 billion out of the economy?
The White House says zero. Their job numbers assume all $200 billion is “new” and supports jobs that would not otherwise exist.
This is absolutely implausible. How can adding $200 billion to one part of the economy support 650,000 jobs, but removing $200 billion from another part of the economy not cost a single job anywhere?
Some assert that this $200 billion is new spending because it was borrowed from savers. But that assumes the people who lent Washington the money would have otherwise saved exactly 100 percent of it. Even if one conservatively assumes they’d have saved half of it, then (by their Keynesian theory) only $100 billion would be “new” spending supporting new jobs. The other half merely replaced private spending/jobs with government spending/jobs. So cut the jobs created/saved figure in half.
But wait, there’s more. Even the money borrowed from savers isn’t “new money.” Savings do not fall out of the economy. They are invested or deposited in banks — which then lend them out to others to spend. Even when recession-weary banks hesitate to loan money, they invest it in Treasury bills instead. They don’t hoard customer deposits in massive basement vaults. Consequently, one person’s savings quickly finances another person’s spending. (And even foreign borrowing is financed by an increased trade deficit, negating the effect.) So borrowing from savers doesn’t add new spending, either.
Thus, it is possible that all $200 billion in government spending (and jobs) merely displaced private spending (and jobs) dollar-for-dollar and job-for-job. And this is why the unemployment rate is not dropping.
The White House is telling us that adding $200 billion to one part of the economy created/saved 650,000 jobs, but removing $200 billion from another part of the economy has not cost a single job. They need to be taken to task for such implausible economics.
— Brian Riedl is Grover M. Hermann fellow in Federal Budgetary Affairs at the Heritage Foundation.