Budget

New Study: Stimulus Spending No Cure for Louisiana’s Unemployment

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U.S. unemployment marches on as Mercatus Center finds no relationship between stimulus spending and employment

While the latest claim from the White House is that the Recovery Act has generated or saved 3.6 million jobs, recent research fails to find a connection between stimulus projects and unemployment. In the case of Louisiana, the unemployment rate is at its highest level since the recession began and continues to climb, notwithstanding the state’s $3 billion worth of Recovery Act projects.

If the White House is correct, without the Recovery Act the national rate of unemployment would be 11.9 percent. To put that in perspective, the current rate of 9.6 percent has only been higher in one recession since World War II, and at no time during that period did the published rate exceed 11 percent.

However, in her new report, “Job Creation Update,” Mercatus Center Senior Research Fellow Veronique de Rugy asserts that the promise of reduced unemployment on account of the “gigantic” Recovery Act “did not materialize.”

“To this day, $275 billion has been reported spent in grants, contracts, and loans through the stimulus bill and yet unemployment has not decreased. In fact, the latest data from the Bureau of Labor statistics shows a slight increase in the unemployment rate from 9.5 percent in July to 9.6 percent in August.”

A glance at the figure demonstrates that, if anything, Louisiana and national unemployment have risen in the presence of stimulus funds. In fact “the rate at which displaced workers have been finding new jobs has been the most sluggish of all recessions since World War II,” says Richard McKenzie, an economics professor at the University of California, Irvine.

He attributes this to the way stimulus funding sustains obsolete firms and impedes the flow of capital to new projects. Additionally, he believes that deficits infer future tax increases, and this prospect has turned many employers off of the idea of expanding right now.

The president’s Council of Economic Advisors used two approaches for gauging job gains on account of the Recovery Act. One is “model-based” and uses “multiplier estimates similar to those used by the Congressional Budget Office.” The reference to multipliers draws on the theory that each new dollar spent by government is re-spent and generates economic activity beyond the original transaction. The other approach is “projection” based and “uses statistical procedures to project the likely path of employment.”

The recently resigned Chairman of the Council, Christina Romer, is willing to acknowledge the limited accuracy of these methods, but she stands by their value and emphasizes broad support from other economists.

“There is obviously a great deal of uncertainty around any jobs estimate. But, our compendium of outside estimates shows that respected analysts across the ideological spectrum… agree that the Act has had a significant beneficial effect on employment and output over the past year.”

Karen Campbell, a macroeconomic analyst with the Heritage Foundation, disagrees and described the report as “unclear.” She believes the process by which the Council calculated the economic impact “fails basic standards of economic analysis” and that the Council’s benchmarks for unemployment and GDP numbers were “completely arbitrary.”

“If the administration had used other economic forecasts, the results would not have been as impressive – in fact, some would have shown that the economy lost more jobs after the stimulus package was implemented.”

Placing the asserted job creation number in further doubt, de Rugy pointed out in an earlier report that there was no correlation between unemployment rates at the time of the Act’s passage and how the money was dispersed. So even if one were to agree with the philosophy of deficit-induced employment, “stimulus funds have not been allocated according to a state’s level of economic distress.”

Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy. He can be contacted at fhodgson@pelicaninstitute.org, and one can follow him on twitter.

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