Firm up that squishy jobs math

Austin American-Statesman - - OPINION -

Can you be­lieve they’re still tout­ing that silly met­ric? When I heard last week that the White House would be an­nounc­ing the num­ber of “jobs cre­ated or saved” as a re­sult of the 2009 Amer­i­can Rein­vest­ment and Re­cov­ery Act, my first re­ac­tion was em­bar­rass­ment.

Imag­ine how Christina Romer must feel. The chair­woman of the Pres­i­dent’s Coun­cil of Eco­nomic Ad­vi­sors was dressed in a cheery salmon-col­ored jacket, a com­ple­ment to the up­beat news she had to de­liver on July 14. The $787 bil­lion stim­u­lus en­acted in Fe­bru­ary 2009, which later grew to $862 bil­lion, in­creased gross do­mes­tic prod­uct by 2.7 per­cent to 3.4 per­cent rel­a­tive to where it would have been, and added any­where from 2.5 mil­lion to 3.6 mil­lion jobs com­pared with an ex-stim­u­lus base­line.

“By this es­ti­mate, the Re­cov­ery Act has met the pres­i­dent’s goal of sav­ing or cre­at­ing 3.5 mil­lion jobs — two quar­ters ear­lier than an­tic­i­pated,” Romer said with a straight face. (More than 2.5 mil­lion non-farm jobs have been lost since ARRA was en­acted in Fe­bru­ary 2009, all of them in the pri­vate sec­tor, ac­cord­ing to the Bureau of La­bor Statis­tics.)

How does the CEA ar­rive at these num­bers? It uses two meth­ods, Romer said. The first is a stan­dard macroe­co­nomic fore­cast­ing model that es­ti­mates the mul­ti­plier ef­fect of fis­cal pol­icy. (The govern­ment’s spend­ing is some­one else’s in­come.) The sec­ond method is sta­tis­ti­cal, us­ing pre­vi­ous re­la­tion­ships be­tween GDP and em­ploy­ment to project fu­ture be­hav­ior.

The num­bers might just as well have been pulled out of a hat. Re­call that it was the same model and method the ad­min­is­tra­tion used in Jan­uary 2009 to pre­dict an un­em­ploy­ment rate of 7 per­cent in the fourth quar­ter of 2010 with the en­act­ment of the fis­cal stim­u­lus and 8.8 per­cent with­out. The un­em­ploy­ment rate now stands at 9.5 per­cent.

That same model con­vinced pol­icy mak­ers that the sub­prime cri­sis was con­tained, en­cour­aged the rat­ing com­pa­nies to slap AAA rat­ings on col­lat­er­al­ized garbage, and led banks to be­lieve they had ad­e­quately man­aged their risks and re­served for po­ten­tial losses.

Econo­met­ric mod­els rely on the as­sump­tion that $1 of govern­ment spend­ing gen­er­ates more than $1 of GDP, the so-called mul­ti­plier ef­fect. There is no al­lowance for the neg­a­tive mul­ti­plier on the other side.

Sure the govern­ment can spend money and gen­er­ate GDP growth in the short run: Govern­ment spend­ing is a com­po­nent of GDP!

What it giveth it taketh away from the pri­vate sec­tor via tax­a­tion or bor­row­ing. Ev­ery dol­lar the govern­ment spends is a dol­lar the pri­vate sec­tor doesn’t spend, an in­vest­ment it doesn’t make, a job it doesn’t cre­ate. This is what is un­seen, as Fred­eric Bas­tiat ex­plained in an 1850 es­say.

“If the ad­min­is­tra­tion wants to take credit for ‘jobs cre­ated or saved,’ it should also ac­cept re­spon­si­bil­ity for ‘jobs de­stroyed or pre­vented,’” said Bill Dunkel­berg, chief econ­o­mist at the Na­tional Fed­er­a­tion of In­de­pen­dent Busi­ness.

At the White House brief­ing last week, Romer touted the lever­ag­ing of pub­lic in­vest­ment with pri­vate funds, with $1 of Re­cov­ery Act funds part­ner­ing with $3 of out­side spend­ing. Romer said this pub­lic spend­ing “saved or cre­ated 800,000 jobs” in the sec­ond quar­ter alone.

Once again, what would have hap­pened in the ab­sence of the govern­ment’s tar­geted in­ter­ven­tion? Ac­cord­ing to a June 2009 study by the Kauff­man Foun­da­tion in Kansas City, Mo., well over half of the com­pa­nies on the For­tune 500 list, and al­most half of the fastest grow­ing com­pa­nies in Amer­ica, were started dur­ing a re­ces­sion or bear mar­ket. Dunkel­berg calls this phe­nom­e­non “neg­a­tive push starts.” Peo­ple might not be will­ing to quit their jobs, but if they get laid off dur­ing a re­ces­sion and were think­ing about start­ing a busi­ness, they might seize the day, he said.

“When peo­ple ask me when the best time to start a com­pany is, I tell them the day be­fore the re­ces­sion ends,” Dunkel­berg said. “They can do it on the cheap, and the next day you get cash flow.”

What’s more, firms less than five years old are re­spon­si­ble for all of the net new jobs cre­ated in the U.S., the Kauff­man study found. Job cre­ation by start-ups is more sta­ble, less sen­si­tive to the busi­ness cy­cle.

So, if the goal is to cre­ate more jobs, and start-ups are the ones that cre­ate them, why is the Obama ad­min­is­tra­tion part­ner­ing up with ex­ist­ing firms?

“Job-cre­ation poli­cies aimed at lur­ing larger, es­tab­lished em­ploy­ers will in­evitably fail,” said Tim Kane, Kauff­man Foun­da­tion se­nior fel­low in re­search and pol­icy and author of a fol­low-up study re­leased this month.

Not to worry. The White House has a model that turns fail­ure into suc­cess.

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