Stimulus and Job Creation

Not Necessarily the Same Thing

Once again I'm going to be brave and state the obvious and run the risk of a "Duh" response.  While my point is embarrassingly obvious, I haven't heard anyone make it during the debate on the recently passed stimulus package.

Money spent, even new money spent, on a given project or cause is much more likely to cause a diversion or reallocation of employment than to cause a net increase in employment.

As explained in my Broken Window Fallacy, when a baker has to spend money for a new window because teenagers threw a brick through the old one, he does create additional business for the window repair man, who will likely spend the proceeds on something else, and so on. The broken window does create new spending, and, perhaps, even additional employment. However, the benefits of this new spending are likely to be offset by the money not spent on something else had the window not been broken. That spending would also have led to further spending. The broken window diverted spending and reallocated the benefits, but didn't create net new spending or employment.

Substitute for the broken window the various and sundry new spending projects included in the huge stimulus package. They will result in new business for some, and perhaps even some new employment, but not necessarily any net new employment. Workers used on new projects are likely to be the same workers that would have worked on other similar projects in the same field. The workers on the new projects will be counted and added to the ranks of the newly employed; the same workers won't be subtracted from other projects because the other projects didn't materialize. As Frederic Bastiat would have put it, it's the difference between the seen and the unseen. The seen get counted; the unseen don't.

As the debt piles up, the government programs that don't get funded in the future because of the higher cost of servicing the debt won't be counted either. Those forgone programs of the future won't be counted as a cost of today's stimulus because they won't be seen either. The economy of the future will just be a little less productive and a little more sluggish than it would have been. Less will be seen in the future.

Comments (4)

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  1. prophets says:

    Bob:

    I’ve been concerned with some of the same issue you touch on. The stimulus basically boils down to 3 major issues for me:

    1. Output gap. You fundamentally have to believe in Keynesian logic that there is a massive output gap and the best thing to do is to fill that hole up. Auto industry only seeing 9-10 M SAAR, with capacity at 17 M? Fill that hole up (gov’t buys cars until consumer demand return) and reallocate resources to new sectors (take some capacity down).

    I’d rather see an over stimulated capacity go through its own natural demand destruction, but that obviously doesn’t play well in Washington.

    2. Multiplier. You basically have to believe these multipliers that Obama’s team is putting out. When the gov’t repairs a window they generate 1.5x for every $1 spent. I have a hard time relying on these economic assumptions, they strike me as the same kind of funny math we saw during the .com era when the ratio of Value per Eyeball was a fundamental method of ascribing an equity market cap value to Amazon.com. It’s just simply not credible.

    I’d be curious to hear your thought on the multiplier debate, because this is really the biggest point of contention.

    3. Net economic wealth effect. For me, this is the bottom. What is the real ROI of the $787 B investment? Obama likes to talk about saving or creating 3.5-4 M jobs. But the real question is what is the return on our investment — not the # of jobs. If you give $787,000 to your financial advisor, you are going to ask for a projected return. If Intel invests $7.87 B they are doing it with a projected return in mind — not to save or create 35,000 jobs.

    The reality is that this is another debt fueled spending exercise, displacing the same inappropriate behavior that consumers displayed 2-3 years earlier. The outcome is to basically make China choke on our paper.

    The more Obama spends, and the further our net balance sheet gets stretched (both consumer + gov’t on a combined basis) the bottom line answer for our country is going to end up being a controlled devaluation with the Fed buying the treasuries and Bernanke printing the money to pay for it…

  2. c141nav says:

    What a shame that none of President Obama’s economic advisers “from both sides of the aisle” ever heard of Bastiat. Of course all the readers of CarpeDeim, KruseKronicles, OpenMarket.org, Acton.org, AEI, NCPA, Cato, and so many more are fully aware of the broken window fallacy.

  3. “The workers on the new projects will be counted and added to the ranks of the newly employed; the same workers won’t be subtracted from other projects because the other projects didn’t materialize.”

    This sounds like your saying that, if the local government builds a courthouse, I won’t be able to find workers to build my grocery store. That can’t be right. What am I missing?

  4. T-Bone says:

    “This sounds like your saying that, if the local government builds a courthouse, I won’t be able to find workers to build my grocery store. That can’t be right. What am I missing?”

    I don’t think you’re missing anything. I think Bob is making a mistake. Perhaps in a period of full employment, additional spending in one area would require less resources to be available in another area (the mechanism that causes this would be inflation).

    But when there’s underutilized capital or workers, there’s no loss in having an entity like government utilize it.

    Every day that a person goes unemployed or capital unused is a permanent loss of potential. The maximum gain comes from having full employment at all times.

    To refuse to borrow on this occasion is like a business refusing to borrow to expand it’s business and grow it’s profits just because it would have to pay a comparatively small amount of interest (compared to the profits gained). It’s like refusing to increase standards of living because the people who make the loan also benefit slightly.