Opinion

The Great Debate

The stimulus is working … just not for you

By Guest Contributor
August 24, 2010

The following is a guest post by Bruce Yandle, distinguished adjunct professor of economics at the Mercatus Center at George Mason University and dean emeritus of the College of Business & Behavioral Science at Clemson University. The opinions expressed are his own.

Following the release of the Bureau of Labor Statistics July Employment report, President Obama and his advisors have been hammered about an unyielding 9.5% unemployment rate and a meager July job growth.

There are calls for more stimulus by some, less by others, and new defensive moves by a determined Federal Reserve Open Market Committee to shovel more monetary coal on the fire.

Since the passage of various federal programs in an effort to “save” the economy, the elusive recovery still lacks steam. Despite TARP-inspired bailouts of GM, Chrysler, and AIG; the large $862 billion American Recovery and Reinvestment Act passed in February 2009; Cash for Clunkers as well as actions taken by the FDIC, the overall economy remains in sad shape and the nation’s unemployment rate seems oblivious to the massive effort to bring it down.

But what if we just looked at the targeted sectors of the stimulus effort? After all, Congress did not pass legislation addressing the entire economy.

After examining the BLS employment growth data from July 2009 to July 2010 for a few major sectors, such as autos and banks and manufacturing, there were some that actually grew (see chart below).

employment_growth graph

Federal government employment takes first place — it grew 7.1%. But much of that growth involves lingering census workers so we can’t really count that.

The auto industry follows the federal government in employment growth. Bailouts seem to matter. Employment in the motor vehicle and parts sector grew 6.3%. Meanwhile, privately provided health and educational services grew by almost two percent.

There was also positive growth in professional and business services. In fact, this was a leading growth sector before the Great Recession as well. Apparently, there is still a lot of muscle left in this keystone to the economy.

And, as expected, state-funded education recorded positive growth. Following a special August congressional session, another dose of funding is headed that way again. However, state government employment growth without the education sector is negative. And so is employment growth for local government.

As for other losses, commercial banking was the first to go negative, but only by a small amount. Undoubtedly, the FDIC and TARP salvaged some jobs. Manufacturing registered a small employment decline, but nothing like the larger losses registered by the financial activities and real estate sectors. These two were caught directly in the gears of the housing collapse.

Of all the losing sectors, construction was the biggest one. We know that a popped housing bubble leaves little chance for an early recovery in housing related construction. But we heard a lot of talk about shovel-ready jobs when the large stimulus package was being debated. There was an employment run-up in heavy & civil construction but the full sector did not catch fire.

But for where the stimulus money was directed — autos, banks, teachers, and healthcare — it seems to have worked as Congress intended.

Unfortunately, there was little in the stimulus package for the unidentified, unorganized smaller businesses, where most employment growth always occurs, which is why the unemployment rate hangs still at 9.5%.

Had we wanted to stimulate the entire economy we would have seen tax cuts for all employers and employees, a sure-fire way to put money in the pockets of everybody. So while the sectors that were targeted with trickle-down money have done relatively well, the everyman is still looking for a better day.

Comments
17 comments so far | RSS Comments RSS

This does make good sense. Small business are mold-defying moving targets that would be hard to hit with heavy stimulus spending. Plus, they are the real seeds of growth in our economy. Even bigger companies base a lot of their growth around the acquisition of the best of the little guys. At the very least, spending would lead to a high risk of exploitation and abuse. It could become something like a smaller scale version of the banking exec bonus fiasco.

Careful tax cuts aimed at small business would make a big difference. There would be similar issues to making sure the right people got the cuts, but the IRS is used to splitting hairs and dealing with this kind of thing.

The Bush tax cuts for the wealthy go be allowed to expire to pick up some of the slack for the cuts meant to reduce friction in the real gears of the economy.

It’s good to see that the spending started by Bush and continued by Obama had some positive effect somewhere, but it doesn’t look like the American people really got their money’s worth. Now that the stimulus money is drying up, it looks as if what positive effect it may have had (plus the unmeasurable preventative effects) are starting to wear off. Things might be about to take a big turn for the worse.

Posted by WRL | Report as abusive
 

The ‘everyman’ is angry and scared, and they won’t forgive the politicians for having left them out in the cold.

Posted by yr2009 | Report as abusive
 

The truth is automation and outsourcing in order to reduce costs has backfired in the form of a GDP deficit. When EVERYONE cuts costs (hires the Bobs) then there is a reduction in cash flow of the consumer base.

Fastest fix: carefully structured taxation that reduces corporate/small business liability IF they REDUCE outsourcing and INCREASE employee base. Regulation of this level sounds like interfering, but the U.S. can’t afford to give capital away to China and EU anymore and expect to remain in the game. Just like a good manager, give INCENTIVE to good behaviors, rather than punish bad ones. :)

Posted by DJGreen | Report as abusive
 

For the life of me, I do not understand why just 1/3 of the stimulus for shovel ready projects has been spent

Posted by STORYBURNthere | Report as abusive
 

The stimulus has not worked for anyone or any business. We will more than find out as the days go along

Posted by Dahc | Report as abusive
 

It all made sense until we got to “Had we wanted to stimulate the entire economy we would have seen tax cuts for all employers and employees, a sure-fire way to put money in the pockets of everybody. So while the sectors that were targeted with trickle-down money have done relatively well, the everyman is still looking for a better day.”

With corporations sitting on approximately $800 billion in cash that they are not putting to work, why would we think giving them more cash in the form of tax cuts would have had any effect. Well it would have had an effect, it would have taken even more liquidity out of the economy and put it under corporate mattresses.

Bruce Yandle seems able to criticize someone else’s policy, but he is not able to look at his own policy prescription with the same lack of bias.

Posted by ssg13565 | Report as abusive
 

Did Bruce Yandle really expect anything from the bubble bloated construction industry but a decline after the bubble burst?

Posted by ssg13565 | Report as abusive
 

The bottom line here is that socialism will always bail out capitalism. This stimulus package is one of the biggest scams in the history of our country. The money was always intended to be “trickle down” by nature. Trickle down will always benefit the people at the very top.

Posted by the_sconnie | Report as abusive
 

We must keep our eyes on the “Small Business” ball. A vast majority of the country’s employment is at the hands of “Small Businesses”. And when you get down to it … small businesses are owned by individuals (and families) and as such are defined in current tax code as “the rich”.

So current administration policy is to squeeze the small business owners. Period. That’s why employment, and the whole economy are in the tank, and will remain in the tank until … the engine of the US economy is recognized.

Full scale tax reform combined with government spending cuts is probably the best prescription for fixing our woes both in the short, and in the long term.

Posted by ageek | Report as abusive
 

Not so fast. The statement, “Had we wanted to stimulate the entire economy we would have seen tax cuts for all employers and employees, a sure-fire way to put money in the pockets of everybody.” is an oversimplification.

Those who are out of work do not directly benefit from a tax reduction. Those who earn under $50K would see nearly no benefit from a tax reduction. These are the income brackets that would immediately put any extra money back into the market but they wouldn’t have any extra money from tax breaks.

Middle income earners would see some marginal benefits but since they aren’t as desperate as low income earners, a good portion the retained income would go into savings.

Upper income earners would probably bank all of any tax savings as they would have no marginal propensity to spend the additional money.

Thus the notion that more tax cuts would be stimulative is, frankly, wishful thinking simply to rationalize the disproven Laffer Curve regarding relatively low tax rates. If tax rates were high and exemptions/deductions were low, that would be another story, though.

Posted by GCN | Report as abusive
 

I see a lot about tax cuts stimulating and putting money into Government projects. The problem is akin to priming the pump after you used all the water that was available in the well. Not one politician has addressed the true problem. Our problem has been the so called. “Free Trade Agreements” We cannot compete with other nations under our system. We cannot continue to have high paid Government Workers, full salary pensions and health care, and support an army of lawyers and consultants. We are at the end of the rope and the only way out is down.

Posted by fred5407 | Report as abusive
 

The problem in the economy is DEMAND. The consumer is heavily leveraged. Why hire another checkout clerk when I don’t have customers shopping in my store? Why hire more people on an assembly line if my current crew is meeting the demands for my products? Why hire another person if I’m only now getting back to being profitable? Tax breaks for employers will have limited effect. Unemployment benefits extensions are good ideas. I’d suggest sales tax holidays in sectors beyond school supplies or something along those lines.

Posted by mrchad | Report as abusive
 

Society is a game of musical chairs. What was the name of that book years ago about learning everything there is to know in Kindergarten?

It’s the game of musical chairs. And someone keeps removing chairs. Its a frustrating little game and no fun at all once you loose your place. And the winner doesn’t get to sit for very long before he or she is unseated by the teacher.

Nap time is the other lesson. 10% plus of the country should be doing more nap time. Long nap time. Maybe even terminal naptime? It might be the only sane option in a classroom bursting with more and ever younger children – spilling over from other rooms, buildings and even countries, all vying for about the same shrinking number of chairs, because they lost their chair, or never get to sit in one, long ago.

One could look at the wars as recess. But they aren’t killing off nearly as many millions as the good old days. Now there was a recess that the survivors and great grandparents of the present chair seekers love to remember. In many ways, they never had it so good.

My old Dad is such a comfort. He liked Kindergarten in his day. He still thinks they make too many children and they are all inferior and the wrong kind. And he’d love to play the game of musical chairs if he could. He hates “liberals”, they are the people who ruin the game by trying to provide more chairs or are trying to stop the game entirely.

Posted by paintcan | Report as abusive
 

Did you know that yesterday the most expensive High School in the USA opened in debt ridden L.A., in bankrupt California. It had the best of everything for 1/2 BILLION $$.

Posted by cynicalme | Report as abusive
 

@Posted by GCN. Interesting comment of yours. Another idea floated early in the game (not by a political party – they are all too dumb), was instead of spending $1.5 TRILLION on “stimulus”, to give each family $10,000 as a “tax refund” to spend as they will. It could have been spread over 5 months and would have done more to stimulate all parts of the entire economy. Money in the hands of the population stimulates growth, NOT money in the hands of government.

Posted by cynicalme | Report as abusive
 

The stimulus didn’t do what we were promised. It didn’t keep unemployment at 8%.
If the American people want a real tax break they should read the u.S. v Cryer decision which uses law and precedent to prove you have a right to keep what you earn.
As government grows it costs more and as it costs more it delivers solutions that don’t make sense in the real world.
We have a serious problem with over spending and over taxation. These two monsters are already eating the income of Americans who haven’t even been born yet and with an average debt load of $44,000 for each child born today we can understand how the government spending hurt much more than it helped.
We would have been far better off if we had elected Ron Paul as president, he would not have made the mistakes the rookie in the White House continues to make

Posted by cashman57 | Report as abusive
 

At least someone finally mentioned the proposal to just give all tax-payers 10,000 dollars..

The talking heads can smoke up the room and make fancy speeches all they want, but the bottom line is that if every tax-payer had another $10,000 in there pocket.. a large number of them would have dumped it straight into mortgages or credit card debt.. thus helping to “bail out” the banks.

Sure you’d have a select few that don’t spend money wisely.. but heck.. thats what the banks did ANYWAY.. by giving bonuses and golden parachutes out like they were going out of style.

Posted by RailBended | Report as abusive
 

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