Obama's Fiscal Stimulus Has Saved Jobs

Includes: DIA, SPY
by: Jeffrey Frankel

The National Journal asks:

Is the Obama administration’s stimulus plan helping to create or “save” 650,000 jobs, as the president and his aides say? Is that an appropriate way to measure the stimulus’ impact?

My response:

I am astounded by claims that fiscal stimulus under recession circumstances doesn’t create jobs. Or at least I am astounded when such claims come from reputable economists. Do they think that a construction job on a road-building project doesn’t count as a real job if the funding comes from the government? Or do they think that the increase in demand doesn’t raise output in the aggregate, because the federal debt crowds out private production and so someone else somewhere loses his or her job? That would be hard to believe, at a time when the Fed is keeping interest rates at zero, long-term interest rates are also quite low, and capacity is lying idle. Moreover, Republican lectures to Democrats about the evils of the national debt take real chutzpah, after Presidents Reagan, Bush I and Bush II increased the debt ten-fold during periods when no national emergency required it.

Yes, the effort to identify specific jobs saved is more a political exercise than an economic exercise; the true number of jobs saved, relative to what would otherwise have happened is greater than the 650,000 number. It is legitimate as a communications strategy for the White House to make the benefits concrete by pointing to the many teachers who would have been laid off by fiscally devastated state and local governments in the absence of federal government money. But one problem is that the exercise doesn’t count the indirect effects of most of the spending and tax cuts, where it is hopeless to try to pinpoint whose job was saved.

The biggest problem, of course, is that one cannot estimate accurately, let alone prove, what would have happened in the absence of the stimulus package. Claims by Republican congressmen that one should judge Obamanomics by looking at whether employment is greater now than before February are nonsense. If there hadn’t been a severe recession underway (starting on the predecessor’s watch, if you want to get political about it), there would have been no need for the stimulus. None of us claims that fiscal stimulus creates a lot of jobs on net when the economy is already expanding strongly. The increased government spending that occurred during the terms of Presidents Reagan and Bush after the recessions of their respective first terms had already ended, for example, did not create a lot of jobs. But without the recent stimulus, the recession would have been worse.

The appropriate way to estimate the stimulus impacts is by means of a standard macroeconomic model with fiscal multipliers in it. But if you believe philosophically that fiscal multipliers are zero, even in a severe recession, then neither a standard macroeconomic model nor anything else will convince you.