Last week, it was reported that the ongoing fiscal stimulus program ‘created or saved 11,800 Minnesota jobs.’ Did it really?
This is one of those topics the media and the public remain largely clueless about. It often seems that both champions and critics of the current stimulus program don’t really understand what it is supposed to do or how it is supposed to work.
Let me say at the outset that I don’t support the ongoing manipulation of taxing and spending to manage a nation’s economy in normal times.
My skepticism about such Keynesian “counter-cyclical fiscal policies” stems more from the world’s experience with active use of such policies between 1950 and 1980 rather than from the abstract theories of Keynes’ critics. Attempting to minimize the boom-to-recession-and-back-again swings of the business cycle by varying taxes and spending often did more harm than good for a variety of reasons.
That does not mean, however, that there never is a time when conscious fiscal stimulus is a good policy. In extraordinary circumstances, sharp changes in taxing or spending may be the least bad alternative. In late 2008, we were in just such a situation. We stood at the brink of another great depression. The 2009 stimulus package has many flaws, but it is better than doing nothing.
That said, some claims made for it are inane. That was particularly true for Obama’s campaign assertions that a stimulus package would create specific numbers of jobs in the range of millions. (Those assertions were later qualified by adding the weasel words “or saved” to the claims of jobs created.)
The desire of political operatives to throw out hard numbers is understandable. And the numbers cited probably came from computer models of the economy constructed by respected economists. But these models are highly limited, and the specificity of their predictions is false.
An honest statement would have been something like this: “Our computer model predicts that a fiscal stimulus of X dollars will increase employment by Y workers above what it would be if not for the package. But our model, like all others, depends on assumptions that are questionable in normal times and almost probably false in the extraordinary situation we face right now. So treat our estimate as a best guess.”
Economics, like geology, is a discipline that simply cannot yet make reliable predictions of important future outcomes. It is not like a vaccine test that has few variables — safe or not, effective or not — and where the vaccine is given to thousands of people. In any economy, there are thousands of variables, and any single situation plays through only once. There is no way to rewind the tape and replay 2002 through 2009 to see how things actually would have come out differently if alternate policies had been adopted.
None of the economic models used to support or attack fiscal stimulus plans predicted the major debacle we are in. They are no more reliable in predicting how it may end. And they are of limited use in estimating the benefits of the stimulus package.
But while stimulus advocates are on thin ice, opponents’ arguments are even weaker. They make the same error as those claiming an exact 11,800 jobs. They assume that package is just a make-work program like the WPA in the 1930s. If X dollars were disbursed in Minnesota on programs that employ Y workers, then that is the relevant result.
The effects of spending increases and tax cuts can be far broader. If there is a lot of slack in the economy, greater federal spending can be an overall replacement for at least some decreases in household and business spending. This increased overall demand in the economy can increase economic activity generally and have general employment effects, even in areas that might seem remote from the specific new programs funded.
Moreover, when critics divide total outlays by the claimed number of saved jobs and argue that the results are expensive, they assume that the only object was to transfer wages to this limited set of workers. They ignore the value to society of whatever the funded programs produced, whether new infrastructure or educated children.
Critics who complain that not enough money was spent in fiscal year 2009, that too much went to tax reductions that often were saved rather than spent and that too much went to pork-barrel projects have unrealistic expectations. The stimulus was passed four months into the 2009 fiscal year. There is no way that all $780 billion could have been spent, from a standing start, in the remaining eight months. None of these critics can come up with an alternate list of spending projects that would satisfy their own objections.
When a society digs itself into a major hole, getting out is inevitably messy. Many critics seem to assume that if the stimulus bill had not passed, we still would be as well off as we are now and maybe better. I think not.
We stood on a precipice a year ago, and in the absence of a messy bailout of tottering financial institutions and a messy stimulus program, we would be in far worse shape, perhaps with levels of unemployment and decreased output like those of 1933. But there is no objective way to prove or disprove either view, and there never will be.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.