The Corner

Your Stimulus Tax Dollars at Work

According to the International Business Times, with the $111 million in stimulus money that the city of Los Angeles received, it created 55 jobs. The city controller is understandably disappointed:

“I’m disappointed that we’ve only created or retained 55 jobs after receiving $111 million,” says Wendy Greuel, the city’s controller, while releasing an audit report.

“With our local unemployment rate over 12% we need to do a better job cutting red tape and putting Angelenos back to work,” she added.

That’s $2 million per job. To add insult to injury, this new Mercatus working paper by Jakina Debnam and Matt Mitchell shows that not only is stimulus money often wasted, but it crowds out the private sector. In other words, government spending paid for with borrowed or taxed dollars shrinks the size of the private economy. How much crowding out takes place is an ongoing debate among economists, as the authors explain:

Monetarists, for example, argue that crowding out negates the growth effects of government spending. Keynesians, however, retort that the multiplier-effects of increased government spending dominate. However, on one point there is consensus: fiscal stimulus is most likely to be effective as a short-term fix. In the long run, government cannot get something for nothing and not even the most-ardent Keynesian believes that government should run large, persistent budget deficits.

Some of the stimulus spending is likely to be made permanent, adding to the long term problem. In the president’s 2011 budget proposal, “19 once-temporary programs were slated for extension and another 5 were expanded at a net cost of more than $200 billion over the next ten years.”

According to CBO, the inflation-adjusted cost of crowding out over the long run is a loss of 6 percent in GDP per person in 2025 and 15 percent in 2035. For the economy at large, this means an economic cost of $1.2 trillion in real lost economic activity in the year 2025.

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