links for 2009-10-31
Bill Galston Says: The Obama Administration Should Adopt Bad Economic Policies

In Which Jared Bernstein Does a Bad, Bad Thing...

He 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, 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:

-$92,000Direct federal cost
+$27,000Extra federal and state revenue
$0Extra costs of debt financing
$110,000Value of goods and services produced
-$18,000Discount because we are buying different goods and services than we would ideally, or buying them at a different time
$50,000Value 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
+$77,000Net 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 woul ordinarily by 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.