Was Stimulus More Effective Than We Thought?

Blawgconomics has been unabashedly critical of government stimulus plans. In particular we have written about the seeming inefficiency of the American Recovery and Reinvestment Act as it appears that the certain costs were not worth the debatable benefits. Despite the lack of academic rigour inherent in our calculations, it is becoming clearer that that they were not so far off base. Dartmouth's Bruce Sacerdote and James Feyrer have produced a paper which examines the relationship between ARRA and employment including the impact of types of spending, 'Did Stimulus Stimulate? Real Time Estimates of the Effects of the American Readjustment and Recovery Act.'* Though the pair went beyond pure per job cost data to explore multiplier effects, determining per job costs was clearly an important part of their analysis. From the abstract:

'We use state and county level variation to examine the impact of the American Recovery and Reinvestment Act on employment. A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000. These results imply Keynesian multipliers between 0.5 and 1.0, somewhat lower than those assumed by the administration. However, the overall results mask considerable variation for different types of spending. Grants to states for education do not appear to have created any additional jobs. Support programs for low income households and infrastructure spending are found to be highly expansionary. Estimates excluding education spending suggest fiscal policy multipliers of about 2.0 with per job cost of under $100,000.'

What to make of this? Well, it would appear that ARRA cost taxpayers somewhere between $170,000 and $400,000 per job**. This is on the high side for per job costs, even if a little lower than our estimates. Notably, if education spending is excluded, per job costs were around $100,000. Though this is getting a little closer to a palatable number, it still seems to be on the high side given that many of the jobs created by the stimulus plan were temporary and most likely didn't pay as much as they cost. In other words, the stimulus package might have been marginally more effective than we estimated, and was relatively more effective in certain sectors than others, but it was inefficient nonetheless.

Matthew Philips at Freakonomics points out that the authors acknowledge (a number of times) that the fatal flaw inherent in their analysis (and also in our criticisms of stimulus) is a lack of a proper baseline. In other words, it is impossible to know what would have happened in the absence of the stimulus package. This is something that supporters of the stimulus plans passed by Congress will always have in their pocket, the idea that per job costs are an inappropriate measure of stimuli because the alternative could have potentially been epically poor economic conditions in the US. Part of this argument would surely include the idea that multiplier effects make each job more valuable to the economy than it might seem.

However it is hard to ignore the pure numbers in this situation, in part because they are so big and in part because they are really all we have to go on. And, after viewing the best study involving the pure numbers we have yet seen, we still remain unconvinced that the benefits produced by ARRA were worth the cost.

* Yes, they are talking about the American Reinvestment and Recovery Act, which is apparent once they proceed with analysis. The draft linked to is apparently from early stages of the research, and it is possible that this error has been remedied in subsequent versions.

** Our estimates had ranged between $237,000 and $690,000 per job. Why the difference? Our estimate looked at the overall costs of the plan as cited on the federal level and various estimates of jobs saved or created. Meanwhile the study in question looked at state and even county level data for jobs and actual spending data on ARRA as not all authorized funds have actually been spent. In other words, Feyrer and Sacerdote dug deeper than us and were able to come to what are, in all likelihood, more accurate estimates.

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