Are We Stimulated Yet?

About this time last year, the nation was debating the need for the government to take action to save the economy from certain doom. The government had already saved the financial sector from certain doom with the Emergency Economic Stabilization Act of 2008, so by virtue of this Bush era legislation, it seemed that the government was qualified to save things from certain doom. This was to be a massive plan. It was called variously "Stimulus" or "Spendulus," but eventually they settled on the American Recovery and Reinvestment Act of 2009. American Thinker saw published an article considering whether it would be a good idea to have a backup plan. So how are we doing?

The Recovery Act was signed into law in February of 2009. It was not clear what the indicators of success for the Recovery Act were at the time, but it seemed that keeping unemployment from exceeding 8% would be one of them. Without the plan, it was said unemployment might well exceed 9%. Related to this was a promise that some number of jobs would be "created or saved." So employment is probably the best metric for measuring success.

Employment

According to the U.S. Bureau of Labor Statistics, the national unemployment rate exceeded 8% in February of 2009, the same month that the Recovery Act was passed. The rate exceeded the dreaded 9% level in May and the unanticipated 10% level in October. The unemployment rate in 2009 increased from 7.7% in January to 10.0% in December. By comparison, unemployment in 2008 rose from 5.0% in January to 7.4% in December. The rate rose by 2.4% in the year before the Stimulus plan and by 2.3% in its year of adoption. The administration has dropped the policy of defending the plan through the claim that some number of jobs has been "created or saved," perhaps because it was becoming a cliché.
The claim that the Recovery Act has slowed the rate of decline is questionable, even if the near-identical performance of the unemployment rate of the previous year is ignored. Consider this table, again from the Bureau of Labor Statistics, which shows employment statistics for several demographic groups with a focus on educational level (non-HS grads, HS grads, some college, and college grads). At first glance, it appears that the cost of unemployment has been shouldered equally among the four groups. For example, looking at the Seasonally Adjusted numbers, the unemployment rate among non-HS grads went from 11.2% to 15.3%, a 4.1 percentage-point move, or just a bit over a third of the starting number. College grads went from 3.7% to 5.0%, a move of 1.3 percentage points, or just a bit under a third of the starting number. So the college grads are only slightly better off, right?

Perhaps not. The labor force of non-HS grads went down by 135,000, while the labor force of college grads went up by 778,000. So the advantage of being a college grad would be somewhat greater than the raw data imply if you look a little bit behind the numbers. What seems to be happening is that companies have cut positions that are easily replaced. Companies will make the economic decision to retain a position, even at a loss, if replacing that employee costs more than can be recovered by avoiding paying for the employee. Positions held by persons without a degree tend to be more easily replaced than those held by graduates, so which jobs are cut? Of course, the rate of job loss will subside over time since jobs that are easily cut already have been. 

The Recovery Act did contribute to the growth of jobs in the public sector, and that does impact the unemployment rate. But is it fair to compare new government jobs to new private-sector jobs? To answer this, it is important to acknowledge that the government is not like a business in the economy. Businesses and individuals prosper when they provide valuable goods and services that are in demand in the marketplace. The government prospers when companies and individuals prosper. When the government borrows money to expand, it denies capital to the private sector in the short term and imposes a burden on it in the long term as the taxpayers are called on to repay the loans. So when the government borrows money to create a job, it costs a comparable job plus interest in the private sector. The government is running a huge deficit, so any additional spending must be either borrowed or created through inflation.

According to Recovery.gov, only a fraction of Recovery Act funds have been distributed. Proponents may suggest that there simply has not been time for the program to work; the sheer volume of dollars cannot be distributed so quickly. Billions have been allocated to nuclear power concerns, yet we are building no new nuclear power plants -- an activity that would significantly stimulate the construction and manufacturing sectors and provide reliable energy for decades to come. What difference does it make how quickly the dollars are disbursed if they are not used for activities that generate real jobs?

Factors Other Than Employment

A couple of factors other than employment might be used to measure how effective the Recovery Act has been. One is the misery index. According to miseryindex.us, the misery index was 7.63 in January of 2009. In November, it was 11.84, which means "worse." By comparison, the misery index was 9.18 in January of 2008 and 7.77 in November (going from January to November to show comparable periods). Things were improving prior to passage of the Recovery Act, at least in terms of the misery index.

The Hooveresque "a chicken in every pot and a car in every garage" also comes to mind. The price of chicken is lower now than it was in January of 2009, but there is no reason to suspect it had anything to do with the Recovery Act. The car in every garage part did come into play in the form of the Cash for Clunkers program. This program provided incentives for owners of old, inefficient cars to trade them in for new, efficient ones. It was a good deal for people getting ready to trade in their old car anyway, and for foreign car companies that make fuel-efficient cars at a reasonable price. Since it required a trade-in, it added not one car to a garage that didn't already have one.

Cash for Clunkers provides a clue as to why stimulus programs such as this one do not work very well. They simply move funds from one place and put them in another. Someone benefits at someone else's expense. It's like the man with the blanket that was too short to cover his feet, so he cut a strip from the end near his head and sewed it to the end near his feet.

No, the blanket scheme did not work. The Recovery Act does not seem to have worked very well either in any measurable way. The good news is that our leaders are considering a Plan B. The bad news is that it looks a lot like Plan A. There's an old saying about doing the same thing over and over again expecting different results. This particular instance may not really be symptomatic of insanity, but it does not seem prudent, either.

Tom Bruner holds an MBA from an ivy-free institution somewhere in darkest America.
About this time last year, the nation was debating the need for the government to take action to save the economy from certain doom. The government had already saved the financial sector from certain doom with the Emergency Economic Stabilization Act of 2008, so by virtue of this Bush era legislation, it seemed that the government was qualified to save things from certain doom. This was to be a massive plan. It was called variously "Stimulus" or "Spendulus," but eventually they settled on the American Recovery and Reinvestment Act of 2009. American Thinker saw published an article considering whether it would be a good idea to have a backup plan. So how are we doing?

The Recovery Act was signed into law in February of 2009. It was not clear what the indicators of success for the Recovery Act were at the time, but it seemed that keeping unemployment from exceeding 8% would be one of them. Without the plan, it was said unemployment might well exceed 9%. Related to this was a promise that some number of jobs would be "created or saved." So employment is probably the best metric for measuring success.

Employment

According to the U.S. Bureau of Labor Statistics, the national unemployment rate exceeded 8% in February of 2009, the same month that the Recovery Act was passed. The rate exceeded the dreaded 9% level in May and the unanticipated 10% level in October. The unemployment rate in 2009 increased from 7.7% in January to 10.0% in December. By comparison, unemployment in 2008 rose from 5.0% in January to 7.4% in December. The rate rose by 2.4% in the year before the Stimulus plan and by 2.3% in its year of adoption. The administration has dropped the policy of defending the plan through the claim that some number of jobs has been "created or saved," perhaps because it was becoming a cliché.
The claim that the Recovery Act has slowed the rate of decline is questionable, even if the near-identical performance of the unemployment rate of the previous year is ignored. Consider this table, again from the Bureau of Labor Statistics, which shows employment statistics for several demographic groups with a focus on educational level (non-HS grads, HS grads, some college, and college grads). At first glance, it appears that the cost of unemployment has been shouldered equally among the four groups. For example, looking at the Seasonally Adjusted numbers, the unemployment rate among non-HS grads went from 11.2% to 15.3%, a 4.1 percentage-point move, or just a bit over a third of the starting number. College grads went from 3.7% to 5.0%, a move of 1.3 percentage points, or just a bit under a third of the starting number. So the college grads are only slightly better off, right?

Perhaps not. The labor force of non-HS grads went down by 135,000, while the labor force of college grads went up by 778,000. So the advantage of being a college grad would be somewhat greater than the raw data imply if you look a little bit behind the numbers. What seems to be happening is that companies have cut positions that are easily replaced. Companies will make the economic decision to retain a position, even at a loss, if replacing that employee costs more than can be recovered by avoiding paying for the employee. Positions held by persons without a degree tend to be more easily replaced than those held by graduates, so which jobs are cut? Of course, the rate of job loss will subside over time since jobs that are easily cut already have been. 

The Recovery Act did contribute to the growth of jobs in the public sector, and that does impact the unemployment rate. But is it fair to compare new government jobs to new private-sector jobs? To answer this, it is important to acknowledge that the government is not like a business in the economy. Businesses and individuals prosper when they provide valuable goods and services that are in demand in the marketplace. The government prospers when companies and individuals prosper. When the government borrows money to expand, it denies capital to the private sector in the short term and imposes a burden on it in the long term as the taxpayers are called on to repay the loans. So when the government borrows money to create a job, it costs a comparable job plus interest in the private sector. The government is running a huge deficit, so any additional spending must be either borrowed or created through inflation.

According to Recovery.gov, only a fraction of Recovery Act funds have been distributed. Proponents may suggest that there simply has not been time for the program to work; the sheer volume of dollars cannot be distributed so quickly. Billions have been allocated to nuclear power concerns, yet we are building no new nuclear power plants -- an activity that would significantly stimulate the construction and manufacturing sectors and provide reliable energy for decades to come. What difference does it make how quickly the dollars are disbursed if they are not used for activities that generate real jobs?

Factors Other Than Employment

A couple of factors other than employment might be used to measure how effective the Recovery Act has been. One is the misery index. According to miseryindex.us, the misery index was 7.63 in January of 2009. In November, it was 11.84, which means "worse." By comparison, the misery index was 9.18 in January of 2008 and 7.77 in November (going from January to November to show comparable periods). Things were improving prior to passage of the Recovery Act, at least in terms of the misery index.

The Hooveresque "a chicken in every pot and a car in every garage" also comes to mind. The price of chicken is lower now than it was in January of 2009, but there is no reason to suspect it had anything to do with the Recovery Act. The car in every garage part did come into play in the form of the Cash for Clunkers program. This program provided incentives for owners of old, inefficient cars to trade them in for new, efficient ones. It was a good deal for people getting ready to trade in their old car anyway, and for foreign car companies that make fuel-efficient cars at a reasonable price. Since it required a trade-in, it added not one car to a garage that didn't already have one.

Cash for Clunkers provides a clue as to why stimulus programs such as this one do not work very well. They simply move funds from one place and put them in another. Someone benefits at someone else's expense. It's like the man with the blanket that was too short to cover his feet, so he cut a strip from the end near his head and sewed it to the end near his feet.

No, the blanket scheme did not work. The Recovery Act does not seem to have worked very well either in any measurable way. The good news is that our leaders are considering a Plan B. The bad news is that it looks a lot like Plan A. There's an old saying about doing the same thing over and over again expecting different results. This particular instance may not really be symptomatic of insanity, but it does not seem prudent, either.

Tom Bruner holds an MBA from an ivy-free institution somewhere in darkest America.