Sesame Street Economics=Obamanomics

In February of 2009, America began a great experiment.  Over the course of time, liberals tried everything in their power to show that Reaganomics was harmful to the country.  They twisted numbers, obfuscated results.  Critics of free market, classical economics became strident in advocating for government intervention and central control.  With the Democratic wave that began in 2006, and culminated in electing the most hard leftist President in American history in November 2008, Democrats seized their opportunity.  They passed the largest stimulus package ever.  Deficit, Keynesian, prime the pump government spending to re-ignite an economy that had seized because of too many misplaced government incentives.

It’s been slightly over two years since that fateful vote.  The results are in.

Economists Timothy Conley and Bill Dupor have released a study that shows and interprets the effect of large government stimulus.  Here are some snippets.  I suggest you read the whole thing and look at their pretty charts and graphs.

“Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services. This suggests the possibility that, in absence of the ARRA, many government workers (on average relatively well-educated) would have found private-sector employment had their jobs not been saved. Searching across alternative model specifications, the best-case scenario for an effectual ARRA has the Act creating/saving a net 659 thousand jobs, mainly in government.”  (italics mine)

The paper clearly explains their methodology, and all the parameters they used.  For example, if a state lost one dollar in sales tax revenue due to economic downturns, it was replaced by a dollar of aid from the Federal Government.  That dollar is essentially, “fungible”.  They examine what the state did with that dollar to create/save jobs.  Net result, no private sector jobs were saved, and were in fact destroyed at the expense of saving government jobs.

They clearly debunk the liberal meme of “shovel ready projects”.

Here is some analysis, “Texas provides a case in point. In Texas, ARRA dollars arrived and simultaneously the number of Texas highway, bridge and street construction workers declined. Employment in that sector fell from 34,600 workers in May of 2008 to 28,500 workers in May of 2010. Total capital outlay on highways in Texas (fiscal year ending on August 31) went from $3.38 billion in 2009 to $2.82 billion in 2010. This decrease in state expenditures occurred even though Texas spent $0.70 billion in ARRA highway funds during 2010.16 The Texas government responded to its receipt of ARRA highway dollars by cutting Texas’ own contribution to highway spending, which freed up state dollars to boost suffering state finances.”

They also go through and highlight other Keynesian economists that modeled the stimulus and its effect on job creation.

“The most crucial difference between their analysis and ours may be aggregation. In their regressions, the jobs effect is restricted to be identical across employment sectors. Our modest disaggregation into four sectors demonstrates that different sectors responded differently to ARRA aid. First, we are able to reject statistically the hypothesis of identical sector responses. Sec- ond, these differences are also quantitatively important. Third, the different trend behavior, over the last decade, across sectors suggests different employment processes are at work. Finally, the practical consideration that much aid flowed through state and local governments suggests that government employment should be treated differently than private-sector employment. Also, differences between our results and theirs might be explained by the differences in instruments; Feyrer and Sacerdote (2011) use the average seniority of members of the U.S. House of Representations to control for endogenity.”

They conclude that more study needs to be done. But, right now it’s clear that the stimulus had “surprisingly, either negligible or negative effects of the Act on total employment”-so back in February of 2009, we would have been better off doing nothing.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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