The New York Times ran an article today on the $787 billion federal stimulus program, which has created or saved 640,239 jobs. If the spending continues at roughly the current rate, it looks as though each job “created” has cost future federal taxpayers $1 million. In a country with 15 million unemployed, will saving 640,000 jobs cut the hard times short? Maybe. Let’s look deeper.
According to the article, most of the jobs “created” have in fact been those of unionized public employees, such as school teachers. Due to union contracts, states cannot cut workers’ pay, so when they run short of funds they must lay off workers. The same union agreements usually stipulate that the youngest workers be cut first and those workers are the cheapest so massive numbers of them have to go before significant cost savings are realized. By spending federal money, Michigan was able to retain 22,514 teachers that it could not have afforded on its local tax base.
Suppose that you’re a business trying to decide where to invest in a new facility. You’ll pick a place with the lowest costs and most stable environment. How does Michigan look? Counting the underemployed and discouraged, perhaps 25 percent of the citizens are jobless. Yet the teachers are the 4th highest paid in the nation (source). The situation is clearly not sustainable. Greenwich, Connecticut can have highly paid teachers indefinitely, but Flint, Michigan cannot. Our potential investor knows that eventually this federal money will be exhausted and Michigan will have to fall back on whatever taxes it can collect locally. Will there be new property taxes on factories? A local corporate profits tax? Additional payroll taxes? Crushing property taxes on residential real estate? Crushing income taxes on workers? Once these taxes are imposed, will citizens flee the area, leaving the remaining residents with even larger per capita obligations? Who knows? And why take that kind of risk when it is possible to build the facility in a state whose expenses are in line with the locals’ wealth?
The stimulus money is apparently not being used to invest in infrastructure that can be used by the future generations who will be paying for it. It is being used to delay restructuring by states whose payroll and pension expenses cannot be sustained via local taxation. The overhang creates fear among private investors. Fear causes them to hold back, thus prolonging the recession, as noted in The Forgotten Man, a history of the Great Depression.
Does that make sense?
[And if you don’t believe this argument, there is no shortage of investment opportunity in the Great State of Michigan!]
It doesn’t make sense. You state: “The stimulus money is apparently not being used to invest in infrastructure that can be used by the future generations who will be paying for it.” There are two problems with this argument:
Problem 1: Education, like infrastructure, is an investment “that can be used by the future generations who will be paying for it.” A more educated workforce leads to the same types of economic improvements as more capital — indeed, more likely to more.
Problem 2: The recession is assume to not be eternal. In the short term, state tax bases are down quite a bit, but they will return to their previous levels. The great state of Michigan could afford the number of educators it has two years ago (modulo deficit spending). It will be able to afford them again in a few years. The problem is in the interrim. If stimulus spending prevents Michigan from firing teachers today and rehiring them in three years, that may very well be money well spent. Recessions, like economic expansions, spiral — you fire a person, and they stop spending, which results in lost income for others, which results in more people being fired, and so on.
The core idea from Keynsian economics that the government tries to even this cycle out by running a surplus during expansions and a deficit during recessions is good, I believe. The core problem is that we only do half of that — deficit spending during recessions. During expansions, Republicans insist on maintaining deficit spending, and usually get their way (Democrats like to both tax and spend, while Republicans spend about the same as Democrats, modulo a few million in so-called pork barrel projects, while lowering taxes).
Pete: Regarding Problem 1, where is the evidence that spending more money on a U.S. public school system results in better outcomes for the students? Where is the evidence that paying a group of schoolteachers the 4th highest salaries in the nation causes them to be more effective than if they were paid the 10th highest salaries? Stimulus or no stimulus, the state would have to find a way for every school-age child to attend a school. In fact, given the population shrinkage, the average Michigan school-age kid may soon have two schools from which to choose.
Regarding Problem 2, the “great state of Michigan” is not a fixed resource. The population was shrinking and the number of jobs shrinking faster even when the U.S. economy was supposedly healthy (see http://online.wsj.com/public/resources/documents/info-censussort122007-sort.html for example). A shrinking and increasingly jobless group of people cannot afford the same government that they had two years ago or at any time in recent history.
Keynes postulated a closed economy. I don’t think that his theory can be applied when the people can move to North Carolina and the money can move to China and India. I wrote about this in http://philip.greenspun.com/politics/economic-recovery ; if Keynesian economics worked, Japan would have the world’s fastest-growing economy.
You could say: The Federal stimulus “softening” hard times by delaying state restructuring?
I think an agrument could be made that by slowing the effects of the recession, it gives individuals and states time to make adjustments.
On the downside, there is no longterm benefit to the stimulus.
Dana: As far as I know, Michigan isn’t using the breathing space afforded by the stimulus money and the $50 billion transferred from workers in other states to GM and Chrysler retirees. Check out the papers in http://www.crcmich.org/PUBLICAT/budgetcrisis.html for example: “[Michigan] has been operating with a structural deficit, a deficit that will not be eliminated by a more buoyant economy, during the past decade”. Would you invest money in a state that is clearly headed for a financial crisis?
Your assertion that “there is no longterm benefit to the stimulus” should be dispiriting to young people because they’ll be paying off the $787 billion in new debt for many decades to come.
@Peter, @Dana, All that the stimulus is doing is preventing “change” [1]. It is also preventing society to naturally get back on its feet from a fall — even with a short (or long) term pain. With the stimulus, we are like a driver inside a tunnel, with no lights, believing that the tunnel is straight, endless, and we are all alone in it.
[1] I quoted “change” because it’s the platform that President Obama run on.