The Alchemy of Stimulus Job Numbers: Spinning wishful thinking into election gold.

Wednesday, August 22, 2012

Ever wonder how it’s possible that stimulus spending has created so many jobs, and yet unemployment seems stuck above 8%? There are many reasons, of course, but one of the more obvious is that the President is overstating the number of jobs he claims to have created or saved.

It’s no secret that I’ve been critical of our government’s efforts to encourage economic recovery, and of the stimulus program that was funded by the American Recovery and Reinvestment Act. I don’t think President Obama and Congress, Democrat and Republican incumbents, understand how the economy works. Bold talk, I know, but then so are the boasts the President and Democratic incumbents, in particular, are fond of making about all the jobs they’ve funded.

The question is, how do they know? The economy isn’t responding they way they hoped it would from an injection of $840 billion. Why not? Most likely, because the thousands of projects the ARRA funded didn’t focus that .84 trillion dollars in a way that would have created the maximum, most immediate and most consequential impact on consumer demand.

Okay, I’m in an intellectually generous mood. The President and I will agree to disagree. We can argue about the economics of recovery policy later. What’s bothering me is the numbers they’re throwing about. I don’t think our government has a clue how many jobs it’s created. I think, at best, what we’ve done is burned up some excessive inventory and under-utilized labor which is an essential precursor to recovery, however politically unimpressive. Companies don’t order more inventory, more materials until they’ve sold what they have in stock. Likewise, they don’t hire more people until the employees are working to the maximum, and then some.

Let’s talk about these job numbers with reference to stimulus program expenditures in Maryland. I have three tables I want to show you. Unfortunately, they’re too big to embed in this article, so I’ve put them into a PDF which you can see (and print) by clicking on the link below.

ARRA Project Funding in Maryland, By Congressional Districts

The first table you’ll see shows the number of ARRA projects that have impacted the Maryland economy, broken down by Congressional Districts. Impressive, isn’t it, how many different projects you can fund, 6,372 to be precise, even in a relatively small state, when there’s no responsible limit on what you are willing to borrow? ..Okay, that was snide. I apologize.

The second table shows how much money was approved to fund those projects. These amounts include dollars originating from projects funded in other states, a portion of which was sub-contracted to Maryland companies, and they are net of money for Maryland projects that was sub-contracted to companies out-of-state.

If these dollar amounts see large to people reading this from Maryland, it could be because of the “StateStat” reports issued by the Governor’s office on a quarterly basis. These reports currently show $3.16 billion in total awards, of which $2.56 billion (81%) has been spent through March 31 of this year – but that’s only the ARRA money that came or is going to come into Maryland through various state agencies. The actual total for Maryland, including ARRA funds coming directly from the federal government, is the $7.84 billion shown in the second table.

The third table shows how much has actually been spent.

1. Dilution. Notice that expenditures are spread out over four years, and are still on-going. So what? Well, the smaller the level of expenditures for a given initiative, the less the impact. Our national Gross Domestic Product (GDP), the annual output of the economy, is approximately $15.6 trillion. Against a number that huge, even if the entire $840 billion – which is 5.25% of our GDP – were spent in a single year, it still might not have the desired impact on unemployment. Spread out over four or more years, it’s all that less impressive.

The same logic applies to Maryland’s state economy. Look back at the second and third tables, at the far right column that shows ARRA funding as a percent of state GDP that is approximately $300 billion. Notice that the annual percentages in this column are small, no more than 1.40% in 2009, quite possibly too small to have any material impact.

2. Net jobs. In all likelihood, our economy will recover from the current recession by itself, eventually, without significant government intervention. Sooner or later, and that’s the rub. At best, the purpose of government stimulus initiatives should be to facilitate and to encourage a recovery, without making a mess of the economy in the process and that’s easier said than done. The question I’m raising is whether or not we have any reasonably accurate basis for claiming that our recovery programs created or saved a specific number of jobs net of what the economy would have accomplished in their absence.

Even if the economy recovery is slower than we would like, it’s entirely possible that a “natural,” “organic” recovery without government intervention would be more enduring and beneficial for longer-term economic development. Messing with the economy is serious business that no economist and, most assuredly, no politician fully understands.

3. Inventory. It’s possible, in a severe recession, that a substantial portion, if not all, of every dollar spent went to burning inventory and under-utilized labor. Without question, depletion of inventory, whether it’s material or human, is the prelude to recovery. Even if the stimulus program is working as a means of prepping the economy for recovery, it may not be doing enough to lower the unemployment rates we’re all watching.

4. Job estimates. “Direct” jobs creation data – the people hired by the company or other entity receiving project funds – are reported by the project entity based on amount of labor needed to do the work the project entails, without regard to whether or not that labor came from new hires or existing employees. That’s a real problem. To take credit for having created these direct jobs, which the President and most Democrats do, is to argue that these jobs were all new hires, and that that they were new hires that wouldn’t have happened without stimulus spending – assertions they have no real basis to make.

5. Multiplier effects. Even the most sophisticated economic models can’t accurately estimate secondary and subsequent “multiplier” effects of any stimulus program expenditure. Certainly, multiplier effects are real and quite possibly significant, but estimates are based on computer models, the accuracy of which is generally questionable and certainly variable from project to project.

6. Reporting. In 2009, when the stimulus program was initiated, recipients were instructed to file quarterly reports on number of jobs that were created or saved. That turned out not to work. Effective in 2010 and since then, recipients have been reporting only the amounts of labor – the “Full-Time Equivalents” needed to do a given task, regardless of whether they involved jobs that were created or saved. The point is, you can’t add the 2009 jobs estimates to the 2010 through 2012 estimates because they weren’t made on the same basis. And the 2010 through 2012 numbers don’t necessarily correspond to jobs created or saved.

(About saving jobs, as apart from creating them, just because you give a company money to do a project that uses some of its current employees doesn’t mean that those employees would have been laid off if you hadn’t hired that company. The President says it does, that he’s saved those jobs, but he really has no way of knowing. Likewise with the miracle what was when he save General Motors and Chrysler.)

7. Data. ARRA jobs data is reported on a quarterly basis. Unfortunately, there has been extensive confusion among the thousands of recipient projects as to how they should calculate quarterly labor utilization. Some have included labor hired in previous quarters that is still working, while other projects have only reported new hires in the quarter for which they’re reporting. And then there is the problem of how to report jobs (FTEs) that were “created” in prior quarters, but that are no longer necessary for current project activity. Long story short, the jobs numbers for a given quarter aren’t reliable nor can they be added up over multiple quarters to calculate the total number of jobs the stimulus program has created.

8. Future employment. Who knows what’s going to happen to the jobs we do create or save when the projects we’ve funded with stimulus dollars are completed?

So exactly how many jobs has the ARRA created or saved, and for how long? The ugly truth is that we don’t really know.

Our incumbents in Congress don’t know any better and need to be replaced with good people who will try harder to figure it all out, who will be more concerned about saving our jobs than protecting their own. In fact, here’s a novel thought. Why don’t more of our representatives in Congress, on both sides of the aisle, work on getting re-elected based on their productivity in office, instead of how much money they can raise for their campaigns? It’s really up to us, isn’t it? We need to demand more of our elected officials, and stop settling for less.

Judging from their campaign websites, the two incumbents whose races I’ve been watching – Ben Cardin running for re-election to the Senate and Dutch Ruppersberger running for re-election to Congress – did nothing more than vote their party’s line and haven’t a clue how much was spent in Maryland and the Second District to accomplish who knows what. My grandson could have done as much and he’s only 11 months old. To be fair, he’s very bright, but you get the point and it’ll be a while before he runs for office.

Just once, I wish the President would be honest, tell us he did the best he could, and admit that he doesn’t really know the number of jobs his recovery program created or even saved. The one thing we know for sure is that his stimulus programs haven’t had the desired impact on un- and under-employment, and that it’s time to try something and someone else. That is, after all, why we have elections.

-Next Contestant

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