How Much Is a Stimulus Job Worth?

Jared Bernstein talks about the federal budgetary impact of the stimulus program as if it were its net "cost." It isn't.

Of course, the misinformation starts with ABC's Jake Tapper:

$160,000 Per Stimulus Job? White House Calls That 'Calculator Abuse': Posting its results late this afternoon at Recovery.gov, the White House claimed 640,329 jobs have been created or saved because of the $159 billion in stimulus funds allocated as of Sept. 30.... Ed DeSeve, senior advisor to the president for Recovery Act implementation, said he'd been "scrubbing" the job estimates so much since they came it at the beginning of the month that he now has "dishpan hands and my fingers are worn to the nub."...

The White House argues that the actual job number is actually larger than 640,000 -- closer to 1 million jobs when one factors in stimulus jobs added in October and, more importantly, jobs created indirectly, such as "the waitress who's still on the job," Vice President Biden said today.

So let's see. Assuming their number is right -- 160 billion divided by 1 million. Does that mean the stimulus costs taxpayers $160,000 per job? Jared Bernstein, chief economist and senior economic advisor to the vice president, called that "calculator abuse." He said the cost per job was actually $92,000 -- but acknowledged that estimate is for the whole stimulus package as of the end of 2010...

Jared fell into a trap. The right way to do the accounting is, for each extra year of employment we get:

-$92,000	Direct federal cost
+$27,000	Extra federal and state revenue
$0	Extra costs of debt financing
$110,000	Value of goods and services produced
-$18,000	Discount because we are buying different goods and services than we would ideally, or buying them at a different time
$50,000	Value of having a job to the person who gets one--these aren't people who are indifferent between going to work and getting their head together, after all
+$77,000	Net Benefit to Economy

It's OK to talk about the federal budgetary impact of the stimulus program per job as a "cost" when you are talking to economists who understand the issues.

It is not OK when you are talking to Jake Tapper, who is playing a game of "gotcha."

The right way to do it is, as the table above suggests:

1. The federal government spends $92,000 and increases its deficit by that much--that's a cost.
2. Federal, state, and local governments collect an extra $27,000 in taxes--that's a benefit.
3. There are--given that we are in a liquidity trap--no additional costs of financing the rest of the government's debt imposed by this increase. Investors are not skittish and do not need to be bribed to hold extra government debt in their portfolios by the government offering to pay them higher interest rates. Instead, investors are desperate right now for more Treasury bonds to hold in their portfolios.
4. The extra people put to work produce $110,000 of useful stuff--that's a benefit.
5. However, because we are pulling forward spending from the future into the present--spending the $92,000 now rather than in the future--we are buying stuff too soon, and because the government is all thumbs we are to some degree buying less valuable stuff than we would ordinarily be buying. Figure a 20% discount--that's an $18,000 cost.
6. The people who get the jobs are really happy--it's not as though they are indifferent between working this year and taking time off to get their head together, after all. Not having a job this year greatly harms their quality of life.

Net impact: +$77,000 for each employment-year rescued.

We should be doing more of this right now.

Why shouldn't we be doing more deficit spending all the time? Usually because of (6): when the economy is in its normal state, the marginal worker is somebody who doesn't value having a job all that much--the (6) number is usually on the order of $10,000 rather than $50,000, and so isn't worth the -$18,000 cost of having the government actually do the buying. Plus there is (3): (3)--the crowding-out term--can be quite substantial.

But it isn't now.

Comments

[Dave Wrixon:]

If you are going to do the accounting this way, how about amortizing the cost of the soaring interest repayments at the same time.

Sorry, I forgot you are also assuming that interest rates will stay low.

Just how naive are you people?

Bernanke talks about not contracting the balance sheet too early. He cannot contract the balance sheet at all without either making the Banks or the Federal Government insolvent.

Nov 01 03:17 AM

[User 30417:]

Brad, let me see if I understand our new economics. We borrow money through the sale of treasuries and “create” mostly service economy jobs. Then through these “created” jobs, the newly employed pay local and federal taxes, and purchase mostly foreign produced goods. Additionally, the retained and recently employed are bailing out (future tax liability) the too big to fail institutions, who are then allowed to borrow from the Fed at near zero interest, purchase treasuries and are considered profitable on the spread. Additionally, the too big to fail institutions have new accounting standards that ignore their REO and similar investments while establishing higher lending standards so as not to lend to the real job creators, small business. Thus, the new economy is largely dependent on government spending. Somehow, I do not believe your figure of $77,000 net gain is remotely realistic.

For any economy to be sustainable, the system has to either be either a net exporter of goods and services or the economic system is a closed loop where it is self-supporting. Since a perpetual machine has yet to be discovered, no economy can be a closed loop for very long.

In your rationalization of +$77,000, you are incorrectly counting the state and federal taxes, incorrectly estimating the value of goods and services generated and incorrectly estimating the value of the positions created. A country’s trade imbalance and cash flow must be treated like that of a business. Instead, in effect, the jobs created are basically a welfare payment supported with foreign debt. By supporting industries that are inefficient, we actually have a net loss because of the future obligation of foreign debt.

Money needs to flow to small business and its entrepreneur nature. Instead, we have big government dictating expenditure based on its contributors. Your conclusion that we should be doing more of this nonsense is irresponsible.

Nov 01 09:14 AM

[Ray Lopez:]

User is largely right, and also this figure is suspect: " Net impact: +$77,000 for each employment-year rescued."

This assumes that the government intervention will not result in market distortions. Also it assumes that "but for" the government intervention you would not have a job. This is plainly Keynesian nonsense, that DeLong is famous for believing.

A better policy is for government, if it wants a Keynesian stimulus, to apply it across the board with a tax cut. Or better yet (in an alternate universe) get out of trying to steer the economy and let nature take its course--just like it did with sharp and swift depressions followed by V-shaped recoveries in the 19th century, before the creation of the 1913 Federal Reserve. As economic historian Angus Maddison has pointed out, growth rates in the late 19th century were largely the same as in the late 20th century (comparing apples to apples, since both periods were untainted by any war boom and you can also argue the open immigration policies of the USA of the late 19th century were essentially libertarian and free-market oriented).


On Nov 01 09:14 AM User 30417 wrote:

> Brad, let me see if I understand our new economics. We borrow money through the sale of treasuries and “create” mostly service economy jobs.

Nov 01 10:02 AM

[Ergo:]

Talk about funny accounting. This article proposes the financial equivalent of a perpetual motion machine. Such a thing just isn't possile. E.g., money printing has its limits.

Besides, what tangible value was actually created by all this spending? Economic inefficiency at its finest.

Nov 01 10:49 AM

[Abstract Ba...:]

That you actually wasted time to make up numbers, as well as Jake did, to support your ideologies is comical. How about Jake just saying "The have's see absolutely no value in using 'their' resources so the have-not's remain alive" and how about you saying "The have-not's see absolutely no value in not banding together and taking 'the have's' resources to stay alive". This would be called life on earth.

Nov 01 10:54 AM

[Alan Young:]

Our fundamental economic model is unsustainable. Federal stimulus may be necessary to get us through the crisis at present, but unless we make fundamental changes, it will be woefully insufficient. We need to produce stuff that people need, with maximum efficiency, instead of spending boatloads of advertising money to make people want stuff that we have to import.

But that's a long-range idea, and is outside the power of the Obama administration (or any other politician) to change fast enough to get us through this economic squeeze. People who criticize government support for the economy seem to have forgotten where their investments were just one year ago.

Even if the stimulus is more despised by investors than it deserves to be, I bet it's a lot more popular with the people who still have their jobs only because of Federal help. Mr. DeLong's calculations make sense to me.

However, I will grant you this:

Nov 01 02:30 PM

[a fat panda:]

"the waitress who's still on the job," Vice President Biden said...

This guy reminds me of Dan Qualye who stopped his limo to declare the end of the recession when he saw a help wanted sign at Burger King.

Nov 01 11:09 PM

[a fat panda:]

"The extra people put to work produce $110,000 of useful stuff--that's a benefit. "

Real useful stuff, like the road sign that says : Your Stimulus Dollars At Work, Blah, blah, blah." It is useful for me because I get to mock it on SeekingAlpha, but I am not sure that is a benefit even to those who read it. Maybe it is worth something less than the $110,000 credit you give it.

Nov 01 11:24 PM

[a fat panda:]

Finally, I think Brad is being a bit hard on Jake for playing "gotcha" when he appears to be playing the "I use to work at Enron as an accountant" game. I have to believe that the $27,000 of taxes includes FICA. Technically, legally, and any view you want to take, FICA is a an insurance premium. Including the premium without the future costs, is the "I-think-my-readers-ar... game.

Given the choice between calculator abuse and accounting fraud, I will take the hemlock thank you.

Nov 02 06:14 AM

[Smrt1:]

Wow speaking of voodoo economics..........do people really believe this guy? I have a degree in economics and am about to be a CPA and his funny math sure didn't make sense to me. $27 k assumes a fairly high tax rate just a hair shy of 30% actually...so we are assuming this person has no family deductions, no student loan debt, no mortgage deductions....the list continues....at end of the day fairly certain he/she won't be paying that much in taxes. $0 cost of financing? Have the chinese started loaning to us for free? You cannot count domestic treasury bond offerings because the opportunity cost to the economy in that lost investment potential is certainly not free. I love the absolutely random "$110,000 Value of goods and services produced " statistic. Did a bunch of factories re-open that the unions didn't have their friends in the media tell them about? The money went to pay back the teachers unions for their votes in most cases. Your 20% discount theory could have some merit although I would contend that with growing interest expense on future deficits, the need to cut future spending to compensate and the likely inflation that will come with our liquidity induced drunken stupor, our cost will represent something more than 20%. The last number of $50k is just strange.....if someone makes $92k, brings home $65 (using your almost assuredly false tax figure), why do they personally value their salary at $50k if they are taking home $65k? The math is reminiscent of what was taught briefly in some schools in San Francisco where if you could not figure out the correct answer, just write what makes you feel good and you were given partial credit for trying. Well sir, I don't care that you tried and I certainly don't give you partial credit.

Nov 02 11:50 PM

[Lebarjo:]

When has Dave Wrixon ever been right? Look through his posts. What a sad sack pos!


On Nov 01 03:17 AM Dave Wrixon wrote:

> If you are going to do the accounting this way, how about amortizing
> the cost of the soaring interest repayments at the same time.
>
> Sorry, I forgot you are also assuming that interest rates will stay
> low.
>
> Just how naive are you people?
>
> Bernanke talks about not contracting the balance sheet too early.
> He cannot contract the balance sheet at all without either making
> the Banks or the Federal Government insolvent.

Nov 03 08:24 AM