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Larry Beinhart: Why the Stimulus Package Failed

By Huffington Post
November 9, 2010

The stimulus package failed because it consisted mostly of tax cuts. Tax cuts are among the very worst ways to create jobs and certainly the most expensive.

The stimulus package authorizes 787 billion dollars. According to the official website (Recovery.gov) $565 billion has actually been spent or credited. There are three categories of “stimulus.” Citing amounts spent, they are:

  1. $243.4 billion in tax cuts.

  • $154.5 billion in contracts, grants, and loans. This is what we actually think of as a stimulus, construction and research projects.
  • $166.8 billion in entitlements. This is mostly money to the states to help with unemployment insurance.
  • Estimates of jobs “saved and created” by the package range from 800,000 to 2.4 million (both from the Congressional Budget Office), with other estimates at 1.25 million (IHS/Global Insight), 1.06 million (Macroeconomic Advisors), and 1.59 million (Moody’s).

    Let’s use Moody’s estimate (sort of the high middle, and independent) and round it off to 1.6 million jobs “saved and created.”

    That’s $353,125 per job.

    I’m sorry, but that’s ridiculous. It’s obscene.

    If you have an essentially unlimited line of credit, as the government essentially does, it would appear relatively easy to create jobs.

    “Hey, you, over there on the unemployment line, wanna work cleaning up our national parks? Yeah, we’ll give you a twenty dollar rake, some biodegradable garbage bags, and twenty bucks an hour.” That happens to be 47 cents an hour over the average wage.

    No national parks or monuments in your neighborhood?

    All right, there are lots of empty lots and abandoned homes due to the housing market collapse. “Let’s clean ‘em up. Same deal. That’s forty thousand a year. You can live on that.”

    Presumably the government will be decent about it and pay the usual benefits — social security, unemployment insurance, workman’s comp, and so on — which adds $8.11 an hour. That’s a little less than $17,000 a year, making a total cost of $57,000 per year, per job.

    Jobs don’t exist in a vacuum, not even sweeping the streets by hand with a broom. There has to be a certain number of overhead costs. Not counting salaries of supervisors and such (which would be part of the job creation numbers), not counting benefits (already in there), 15 percent is a very generous number, for another $8,550, a total of $65,550 per job.

    So that’s what a “created” job should cost. About $65,000.

    If you actually want to “create jobs,” that’s how you should do it. Go out and create them.

    But that’s not how we do things. We were not goddamn Communists. Or even socialists. We’re capitalists. So we give out contracts to private enterprises and grants to universities and other institutions.

    Construction projects, one of the primary forms of job creation has lots of costs beside labor. They have machinery, materials, a variety of business expenses (accounting, insurance, legal, etc.), the purchase of land and so on. Labor accounts for 20-30 percent of a construction contract. Let’s take the low end, 20 percent, and assume that a construction job is one of those $65,000 wages plus benefits for a full year jobs, and the cost of that job then becomes $325,000.

    That’s pretty close to the $353,125 per job number we got using the Moody’s estimate.
    Except that all those other construction costs (excluding land purchase, which should be less relevant here) involve additional labor. For example, materials are manufactured, a certain portion of them here, in the US. Truckers transport them. Building supply company employees handle them. Machinery is built (some portion of it here), and maintained (all of it here). The construction company pays it’s staff and the professionals (lawyer and accountants), and so on. All those people buy food (keeping supermarket workers employed), buy other stuff, pay their bills, and so on.

    This is the famous Keynesian multiplier effect.

    It’s also very difficult to calculate how many non-site, indirect jobs does a construction project support with all its other spending. In the figures we’re using, that 80% of the costs. It’s reasonable to say that at least half of that goes into people’s pockets as it moves down the line.

    If we figure it that way, it should probably cost about $130,000 per job.

    Let’s go back to the breakdown.

    First let’s take out the aid to the states for unemployment insurance assistance. Obviously that doesn’t add jobs. It helps people. It goes to keeping the community afloat, but it doesn’t create a whole lot of jobs.

    Let’s take out the tax cuts. Just as an academic exercise, for the moment.

    That leaves projects, grants, and loans. $154.5 billion.

    If we have 1,600,000 jobs created and saved, and divide it into the money spent on projects, it comes out at $96,562 per job.

    That actually makes sense. It’s expensive. But it makes sense.

    Direct job creation, or job creation through contracts (like road building), has a multiplier effect. Each job creates more jobs, both through the support jobs and through the spending by the people who are employed.

    Job creation through tax cuts works the opposite way.

    The price per job is multiplied many times over.

    In this last election cycle, Carl Paladino was running against Andrew Cuomo for governor of New York. One of the charges that Cuomo leveled against him was that he got $1.4 million in tax breaks but created only one job from that.

    The implication was that Paladino was a sleazy rip-off artist. At best.

    He may be, but it is only a particularly vivid example of how the tax cuts to job creation equation actually works.

    We are still arguing about extending the Bush Tax Cuts.

    The Bush Tax Cuts cost about two trillion dollars.

    They were originally labeled and promoted as “jobs and stimulus” packages. Let’s take him at his word. Over the course of his two terms 1.1 jobs were created. That didn’t even keep up with population growth. It also cost $1,818,182 per job.

    Close to the same numbers that Paladino was working with.

    The Obama White House, a prisoner of the prevailing ‘tax cuts stimulate the economy and create jobs’ theology, passed a stimulus bill that was 40 percent tax cuts, 30 percent unemployment insurance, and only 27 percent actual stimulus.

    That’s why it didn’t work.

    That’s not even the bad news.

    Here’s the bad news. The tax cuts are still in effect. The odds are they will be extended, even for the very wealthiest.

    Here’s worse news. There’s only one thing stupider than cutting taxes to create jobs. It’s to cut spending. In the recent NY governor’s race, for example, both leading candidates promise to cut spending. That means cutting jobs. That’s happening state by state all around the country. Not only does cutting jobs mean, in a very direct one-to-one way, fewer jobs, it has a negative multiplier effect. It means there are fewer people with money to spend on the things that create jobs for other people.

    From The Huffington Post