‘The very first law in advertising,” one critic of the $787 billion stimulus bill wrote, “is to avoid the concrete promise and cultivate the delightfully vague.” In selling that bill, Obama claimed that it would “save or create” (delightfully vague!) some 3 million jobs (dreadfully concrete). The trouble with the concrete is that sooner or later somebody will check it out. Newspapers across the country have started looking into the administration’s jobs claims, producing the following headlines:
– “Stimulus Job Boost in State Exaggerated, Review Finds” — The Boston Globe
– “Not All Jobs ‘Saved’ by Stimulus Were in Danger” — The Columbus Dispatch
– “Many California Jobs ‘Saved’ by Stimulus Funds Weren’t in Jeopardy” — The Sacramento Bee
– “Stimulus-Jobs Count in Colorado Overinflated” — The Denver Post
– “Fewer Local Jobs Saved by Federal Stimulus Than Reported” — The News Tribune (Tacoma, Wash.)
– “Illinois Data on Stimulus-Related Jobs Saved, Created Don’t Add Up” — The Chicago Tribune
Ouch. To its credit, the press is checking the administration’s math, debunking claims that the stimulus has created or saved approximately 650,000 jobs so far. It turns out that state and federal officials reached that number by counting raises as “jobs created” and positions that would not have been eliminated as “jobs saved.” Officials have also reported that the stimulus saved jobs in places like Arizona’s 15th congressional district, which doesn’t exist. And even if one were to take the administration at its word, dividing the number of stimulus dollars spent so far by the number of jobs saved or created yields a cost of $160,000 per job.
This is important work insofar as it demonstrates the inability of the government to spend efficiently or wisely. But it leaves a larger question unanswered: Has the stimulus created any jobs at all?
Stimulus backers, who tend to be followers of the economist John Maynard Keynes, would say that the important thing is that the government is spending money on something — anything. Keynes argued that recessions are caused by failures of aggregate demand that can be counteracted only with massive increases in government spending. Keynes famously wrote that even paying people to bury jars of money would be better than no government action at all. (Keynes said that this plan would have an additional benefit: The private sector would employ people to find the jars and dig them up.)
That example sounds ridiculous, but the theory that economic cycles are driven by aggregate demand holds an enormous intuitive appeal. “It takes a very complicated problem and gives it a simple solution,” says Bradford Cornell, a visiting professor of financial economics at the California Institute of Technology. Refuting the theory with empirical evidence has always been difficult, he explains, because it is impossible to hold everything in an economy constant. In other words, Keynesians will always be able to argue that things would have been worse if the government hadn’t acted.
So Cornell redefined the problem. It is a mistake to understand recessions in terms of aggregates, he argued in a recent paper. The correct view is to think of the economy as a giant telephone switchboard, through which resources are connected with demand for them. A sudden spike in the price of housing, for instance, is like a blinking light on the switchboard, signaling construction companies to build more houses, banks to make more mortgage loans, etc. Recessions occur when conditions suddenly change, and resources are no longer properly matched to consumer desires. “Viewed from a matching perspective there is no failure of ‘aggregate demand’ — whatever that means,” Cornell wrote. “Instead, there is a complex misalignment problem which results in a decline in overall output.”
The idea that recessions are matching problems is not new — economists Fischer Black and Friedrich Hayek explored it — and Cornell says he’s been thinking about the concept since 1969. He was trying to write a book on student unrest behind the Iron Curtain, but lacked the travel money to research it. “I stopped in West Berlin and bought about 20 pairs of blue jeans,” he says. Blue jeans were in incredibly high demand in Eastern Europe, where Communist central planners had surfeited the populace with ugly flannel slacks. “One pair of blue jeans could pay for an entire weekend in Warsaw,” he says, “because the Russians did a terrible job of matching.”
All governments, not just Communist ones, are notoriously bad at solving matching problems. In “The Use of Knowledge in Society,” Hayek argued that central planners would never have enough information to guide resources where they are most urgently needed in an economy. Hayek emphasized the importance of prices in matching resources to economic desires. Cornell has refined our understanding of the problem by looking at the central role of personal plans, relationships, and contracts. Something like the housing bubble, he explains, can distort all three. People made long-term decisions based on the expectation that housing prices would continue to rise.
The resulting realignment is likely to be lengthy and costly, and just throwing money at the problem, pace Keynes and his followers, is not going to solve it. There are good reasons to believe it could make things worse. Government has neither the incentives nor the information to allocate economic resources efficiently.
So where is all the money going? The answers to this question have proved useful in demonstrating that the Obama administration’s promises to “save or create” jobs were largely empty. For example: The Associated Press investigated claims that extra funding in the stimulus bill for the Head Start early-education program created or saved 14,506 jobs. One nonprofit in Georgia used the money to give its employees raises, then multiplied its total number of employees (508) by the percentage of the raises (1.84) and told the White House that the stimulus had saved 935 jobs. (Its directors said they were just following instructions they received from the White House.) Other nonprofits did the same. The AP concluded that the number of jobs reported to be “created” by the Head Start funds was at least three times what it should have been.
Going west, the Sacramento Bee wrote that “up to one-fourth of the 110,000 jobs reported as saved by federal stimulus money in California probably never were in danger.” The California State University system claimed that stimulus funds had allowed it to retain 26,156 employees. That’s more than half of CSU’s total workforce. Laying off this many employees would have shut the system down, which a CSU spokesman admitted was never a real possibility. “This is not really a real number of people,” she told the Bee. “It’s like a budget number.”
Other newspapers reported the same thing happening in their states. The fraudulent reporting stems from the fungibility of the $50 billion bailout for broke state governments included in the stimulus bill. States used the money to plug holes in their education budgets while claiming that it prevented mass layoffs of teachers. It is more likely that, instead of firing teachers, states like California and New York would have been forced to undertake long-overdue belt-tightening in other areas.
Careful readers will catch the “other areas” and think that perhaps I am executing a dodge, for it raises the question of whether that belt-tightening would have eventually resulted in layoffs somewhere down the line. The answer is, Yes: The economy is constantly creating and shedding jobs, and it is possible that state governments, like most employers in a recession, might have found some downsizing necessary. But the money we’ve spent to prevent that downsizing had to come from somewhere, and, in that sense, the case for the stimulus is premised on a much bigger dodge: the fiction that the government can tax and borrow without dampening job creation in the private sector.
Keynesians argue that there is no crowding-out effect. Without the stimulus, they say, all that money would be sitting on the sidelines. Eugene Fama, a noted professor of finance at the University of Chicago, takes issue with that. “Give me an example of something that sat on the sidelines,” he says. Earlier this year, Fama wrote a blog post in which he argued that, even in a financial crisis, the private sector is capable of deploying $787 billion more productively than the government could. That is because people do not just bury their money in jars. They make investments — or they deposit their money in banks, and the banks invest it — and these investments create jobs.
Fama’s critics countered that recessions lead to unproductive investments, such as unwanted growth in inventories. But Fama pointed out that inventory growth in 2008 was tiny — $47 billion — relative to the size of the stimulus. Furthermore, Fama says, “even that is not so unproductive. Suppose the inventory got thrown away. . . . The people who generated the inventory still got income.” Tossing out inventory is an unproductive use of resources, to be sure, but so are many of the stimulus projects that keep popping up in the news. This summer, the Ledger of Lakeland, Fla., reported that the stimulus was funding the construction of a $3.4 million “eco-passage” enabling turtles to cross safely beneath a state highway. We might as well have paid ten people $40,000 each to bury $3 million in a jar.
Even in the face of all this negative press, some stimulus supporters persist. What we need now, they say, is a second, “smarter” stimulus package, with an extra focus on creating and saving jobs. Cornell, the Caltech economist, says he’s heard it all before. “Sure,” he says, “that’s what Leo Brezhnev needed: a smarter social stimulus package.”