Ask Unemployed How the Stimulus is Working

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WASHINGTON - How well is the stimulus working? This week saw disappointing data in durable goods orders and housing, prompting some economists to predict a double dip recession.

Yet on Tuesday the nonpartisan Congressional Budget Office issued a report showing that the American Recovery and Reinvestment Act of 2009 increased the number of people employed by between 1.4 and 3.3 million people in the second quarter of 2010 and lowered unemployment by 0.7 to 1.8 percentage points.

CBO concludes that without the Recovery Act unemployment, which stood at 9.5% in July, might exceed 10% and possibly be above 11%.

There's just one problem. CBO's latest figures are inconsistent with its claims of the effects of the stimulus bill when it was passed in February 2009. If its models failed to accurately predict the effects of the stimulus bill then, why should we believe the models now?

This is important because some are taking the CBO report as proof that the stimulus bill is working and so we need...more stimulus. (Although, if the stimulus worked, why do we need more?) Vice President Joe Biden declared on Tuesday, "We have to keep moving forward and build on measures like the Recovery Act that are creating jobs and making us competitive in the 21st century economy."

In contrast, in another speech on Tuesday, in Cleveland, House Republican Leader John Boehner called for Congress not to allow taxes to rise in 2011 and to cut government spending.

After passage of the stimulus bill, in a March 2009 letter to Iowa Senator Chuck Grassley, CBO predicted that the unemployment rate in the last quarter of 2009 would rise to 9% without the stimulus package, from its then-current level of 8.2%. With the stimulus, CBO said, the unemployment rate would range from 7.8% to 8.5%. The actual rate in December, 11 months after enactment of the stimulus, was 10%, far higher than CBO said it would be absent the stimulus.

CBO predicted that in the fourth quarter of 2010 the unemployment rate would be 8.7% without the stimulus, and between 6.8% and 8.1% with the stimulus package. We haven't reached the fourth quarter of 2010 yet, but it doesn't look as if our 9.5% unemployment rate will decline to even the baseline of 8.7% in the next few months, let alone to 8.1% or 6.8%.

One major flaw in the CBO models is the expectation of full employment over the next decade. Unbelievable as though it may sound, in March 2009 CBO wrote, "The effect on employment is never estimated to be negative, despite lower GDP in later years, because CBO expects that the U.S. labor market will be at nearly full employment in the long run." Try telling that to the 14.5 million unemployed.

Rather, employers' willingness to hire varies dramatically depending on the costs of employment. The readiness of Americans to look for work is influenced by the ease of finding jobs, as well as by after-tax income, which is affected by tax rates. The increases in taxation and borrowing, both present and future, required to fund the deficit can have negative effects on employment.

When the stimulus package was enacted in February 2009, the labor force participation rate, the percentage of Americans who say they are working or looking for work, stood at 65.6%. Last month it was 64.6%, a full percentage point lower. After some fluctuations, over a million Americans have withdrawn from the labor force since April 2010.

The Democrats' agenda -- government stimulus programs, trillion-dollar annual deficits over the next decade, new costs on employers for health care, and the prospect of tax hikes in January -- has not succeeded in lowering the unemployment rate from its February 2009 level of 8.2%, a level that looks positively rosy today.

If Americans had known in February of 2009 that the $787 billion stimulus package (whose cost CBO later raised to $862 billion) would not lead to declines in unemployment, but instead a substantial increase in the unemployment rate to 9.5%, opposition to the spending would have been practically universal.

Put it another way - if Americans were asked now whether they would prefer today to have back the February 2009 unemployment rate of 8.2% and the $862 billion spent on stimulus, they would say yes.

Some say things would have been worse if the stimulus funds had not been spent. They assume that more government spending, including the $862 billion stimulus, must be good for the economy. This form of Keynesian economics fell out of fashion decades ago everywhere, except in the halls of power in Washington.

If more government spending always helped the economy, why stop at $862 billion? Why not give each American an unlimited bank account? Then the unemployment rate would likely rise to 100%. But some economists would still offer unverifiable models to "prove" the benefit to the American public.

Bad economics does not make good government, and, as the economic data show, America is wallowing in bad economics.

Unemployed Americans know that they are worse off than before the stimulus package was passed, despite rosy estimates from CBO. It's time to try a different tack - lower taxes and spending - and budget numbers that are based on reality.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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