Out of Control Policy Blog

A Job Stimulus Is a Bad Idea

I agree with Paul Krugman on at least one thing: the continued prospects for high unemployment in America is a bad thing. In his NYT column yesterday, Krugman the Keynesian wrote:

The damage from sustained high unemployment will last much longer. The long-term unemployed can lose their skills, and even when the economy recovers they tend to have difficulty finding a job, because they’re regarded as poor risks by potential employers. Meanwhile, students who graduate into a poor labor market start their careers at a huge disadvantage — and pay a price in lower earnings for their whole working lives. Failure to act on unemployment isn’t just cruel, it’s short-sighted.

Unemployment is currently 10.2 percent, and if you factor out the part-time workers it is 17.5 percent. Banks aren't lending to the limited demand from manufacturers, further depressing employment opportunities. And the recovery outlook right now is bleak. Krugman is right, we have to do something.

His plan, however, is not the answer. Not even close.

It’s time for an emergency jobs program....  Such a program should shy away from measures, like general tax cuts, that at best lead only indirectly to job creation, with many possible disconnects along the way. Instead, it should consist of measures that more or less directly save or add jobs.

So Krugman wants another stimulus package. Just a question first though, uh, wasn't the point of the first stimulus to create jobs? And how did that work out?

Krugman responds:

The 2009 Obama stimulus bill was focused on restoring economic growth. It was, in effect, based on the belief that if you build G.D.P., the jobs will come. That strategy might have worked if the stimulus had been big enough — but it wasn’t.

That is something Krugman has repeatedly harped on—the stimulus was too small. But this ignores that GDP growth stimulated by government spending is not sustainable. Roughly 85 percent of the GDP growth from the third quarter this year was due to Cash for Clunkers,  the First-Time Homebuyer tax credits, and direct government spending (defense and non-defense). This is not a recipe for a strong, vibrant economy.

What does Krugman envision the new jobs focused stimulus to look like?

One such measure would be another round of aid to beleaguered state and local governments, which have seen their tax receipts plunge and which, unlike the federal government, can’t borrow to cover a temporary shortfall. More aid would help avoid both a drastic worsening of public services (especially education) and the elimination of hundreds of thousands of jobs.

Okay, let's stop and consider something. Imagine someone gets a good paying job and keeps it for five to six years. During this time, that person buys a house, a car, a boat, a couple jet skis, and goes into significant credit card debt. But it is okay because the good job allows the person to make payments on the items every month. Then the job goes away. Suddenly all that debt isn't so easy to handle. This is what happened to the states.

State and local governments aren't beleaguered as much as they are obstinate. They just don't want to make necessary cuts. When times were good (roughly 2002-2007) the states ramped up spending given their increased revenues. Now the revenues are gone, but states aren't making the hard budget choices. They aren't pursuing efficient government opportunities like divesting assets and streamlining state operations. Sell the boat, get a smaller house, divest the jet skis.

When it comes to stabilizing services, as Krugman suggests, it is also unnecessary to throw more money at them. According to research for the Reason Foundation, if states had limited increases in their budgets from 2002 to 2007 to just the rate of inflation, plus increases in population, then the 50 states collectively would have had a $2.2 trillion surplus to get them through the recession. Yes, the states increased spending on state services by $2.2. trillion more than they had to during the years of plenty. On the whole, state services aren't suffering as much as they are returning to reasonable levels.

A "job creating" stimulus focused on keeping states from having to make hard, but necessary choices in their state budgets won't solve the employment problem in America.

So what should we do? Well, stop trying to help. The more companies get bailed out, the more the government is inflating wages, decreasing how many people firms can hire. The more the government taxes companies and increases their compliance costs, the less people those firms hire or keep on. The more the government decreases the incentives to start new businesses, the less places there are to find employment.

There is no silver bullet to fixing employment overnight, but the government can take the necessary steps to ensuring it doesn't perpetuate the problem further into the future.

Anthony Randazzo is Director of Economic Research


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