Data” is the plural of “anecdote.”  Most of us are much more comfortable with anecdotes than we are with careful data analysis.  It is therefore perfectly understandable when newspapers and television feature anecdotes rather than statistical analysis to describe the state or trend of the economy. 

Unfortunately, almost every anecdote is open to competing interpretations.  This was obvious at the end of October when the White House released its summary of 150,000 reports submitted by recipients of federal grants or contracts under the 2009 stimulus program.  The reports were collected to help policymakers and taxpayers keep track of the employment effects of stimulus spending.  According to the Wall Street Journal, a Kentucky shoe store owner gave credit to the stimulus program for creating or saving 9 jobs as a result of an $890 contract to supply work boots to the Corps of Engineers.  While the Journal treated this claim with appropriate skepticism, one can imagine business owners who are persuaded to remain in operation as a result of a modest order that spells the difference between insolvency and a tiny profit. 

In essence, the reports distilled by the White House provided evidence from 150,000 anecdotes.  According to the Administration’s summary, the reports offered evidence that 640,000 jobs have been directly created or saved as a result spending or promised spending under grants or contracts funded by the stimulus package. Jared Bernstein, the Vice President’s chief economist, emphasized that the 640,000 count represents an incomplete tally of the total jobs added or saved as a result of the stimulus package.  It is impossible to collect anecdotes from Walmart, Safeway, or Disney World that would tell us how many jobs have been created or saved as result of higher consumer spending induced by the stimulus package.  When a customer buys groceries or takes a vacation in Florida, how can we tell what percentage of the spending was induced by tax cuts or a bigger unemployment check?  We must rely on elaborate, less transparent data analysis to uncover the indirect effects of the stimulus package.  When the indirect effects are included, White House economists estimate that over a million jobs have so far been added or saved as a result of the stimulus.

The Wall Street Journal suggests that the White House estimate of 640,000 jobs saved or created may overstate direct job creation by 20,000 positions.  Even if the Journal’s estimate is correct, the difference represents less than 2% of the total number of jobs directly or indirectly saved and created by the stimulus.  Economists do not agree on how to estimate all the direct and indirect employment effects, of course.  Most of us would agree, however, that the total job effects are likely to be greater than the 640,000 jobs identified in Recovery.gov.  The current employment situation is certainly grim, and it has gotten much worse since the President took office.  The job market is significantly healthier, however, than it would have been if the stimulus package had not passed.

Unless the labor market deteriorates much further, I am pessimistic about the political prospects for another major stimulus package.  The Administration’s opponents have been successful in sowing doubts about the wisdom of the last stimulus.  According to a recent CBS/New York Times poll, a clear majority of Americans now believes the stimulus package has either made the economy worse or had no beneficial impact.  Only about a third of respondents thinks the stimulus has produced economic gains so far. 

With this political background it is unlikely Congress will pass a major new stimulus package anytime soon.  What is more likely -- indeed, what is essential -- is the continuation of stimulus programs that are currently scheduled to expire.  Last week the House and Senate extended unemployment protection for workers who have lost jobs in the current recession.  These protections ought to be extended until the job market improves significantly and it becomes easier for laid off workers to find jobs.  If unemployment is likely to remain over 9% for an extended time, there is a compelling case for additional public infrastructure investment.  Given high unemployment in the construction and capital goods industries and federal borrowing costs that remain near a post-war low, it makes sense to invest in public capital projects over the next few years.  If the federal government does not have adequate plans for such investments, it should start making them soon.

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The 650,000 number of jobs created or saved is clearly not a good measure of the total jobs. In fact, it is entirely too low--the true number of jobs created is likely twice as large. The recovery.gov measure only includes one part of the recovery package, and does not measure, for example, jobs created from project suppliers, or consumer respending of recovery dollars.

--Grant, contract, and loan data are only part of Recovery Act funding. The recipient-level data will include reports from recipients of contracts, grants, and loans, representing only part of the overall recovery package. For example, tax reductions, increased unemployment insurance payments, greater nutritional assistance, and much of the assistance to state governments will not be included in the recipient-level jobs data. So far, these other sources of funding have far exceeded the outlays resulting in contracts, grants, or loans. The initial wave of data released on October 15th will include just contractor data, while data on grants and loans made under the Recovery Act will begin to be released later in October.

--Not all recipients are required to report. Reporting is currently limited to “prime” recipients and the first level of sub-recipients. For contracts directly awarded to private companies, for example, second-level sub-contractors will not be required to report. (Prime and next-tier recipients may report estimated jobs created by subsequent sub-contractors, but no direct reporting is required by the lower-tier companies.)

--Only direct employees will be recorded. Recovery.gov’s recipient-level reports will only include the jobs created directly by the recipient. For example, a new construction worker hired to install a new roof will be included, but other factors will be omitted, including:

     a) “Respending” jobs. Data will not include the jobs saved or created by that construction worker’s new spending, such as the car repairs or restaurant dining that results from their additional income.

     b)  “Upstream” jobs. Data will not include the jobs created at the companies that manufacture, transport, and sell roofing supplies at the retail or wholesale level.  Recovery Act investments will increase demand for business supplies and services, leading to greater employment in sectors that support the direct activity. However, these jobs will also not be included in recipient-level reporting.

In fact, the Recovery package has created about twice the amount reported on Recovery.gov. Using standard multipliers from Moody's Economy.com, it looks like the recovery act added about 2.7 percentage points to annualized growth in the third quarter, and a bit more in the prior quarter (details are here: http://www.epi.org/publications/entry/ib265/.) This translates to somewhere between 1.1. and 1.5 million more jobs than would be around if there had been no stimulus.

Is this enough? With unemployment above 10%, it's clear that more needs to be done to specifically target job creation.

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As Brian Riedl and J.D. Foster have observed, the Obama Administration's job creation estimates attempt to measure the number of jobs the stimulus bill has funded. They ignore the jobs lost because the money that would have funded them went to the stimulus. In economic terms, it ignores the opportunity cost of the stimulus. Consequently, the Administration can claim to have created jobs even as unemployment has hit a 26-year high.

The numbers suggests that the opportunity cost of the stimulus bill has been high: private sector borrowing has fallen sharply in recent months. Absent the stimulus bill, private lenders would have either loaned their money to other borrowers in the private sector or spent it. Instead they lent it to the government, leaving that money unavailable to others.

This has hurt private-sector borrowers severely. The Federal Reserve’s flow of funds reports shows how dire the situation has become. While Federal borrowing soared to an annual rate of $1.9 trillion in the second quarter, up 31 percent from the first quarter, business investment fell from disinvestment at a rate of $22 billion a year to $203 billion between the firsts and second quarters. On net, businesses have stopped borrowing. Businesses that want to expand and invest now have much greater difficulty obtaining credit. Many potential business investments cannot obtain funding.

As the ability to fund business investments has plummeted, both investment and job creation have withered. Year on year, equipment and software investment and the number of new hires have fallen by 19 percent 17 percent respectively. Less investment means fewer jobs. The jobs the stimulus has funded have come at the cost of job creation in the private sector.

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One has to hope that the Obama Administration does not believe its own rhetoric about the supposed success of its fiscal stimulus program in generating new jobs. For while the Administration assures us that the fiscal stimulus is generating new jobs according to schedule, the US labor market continues to deteriorate at an alarming rate. Failure to arrest this deterioration, threatens to abort the incipient economic recovery and to aggravate an already bleak labor market situation.

            The Obama Administration would like us to forget how reassuring they were about the US employment outlook at the time that they first unveiled their fiscal stimulus package last February. At that time, they told us that the stimulus would create around 3 million jobs. They also assured us that with the stimulus unemployment would not rise above 8 ¼ percent of the labor force, while by the end of 2010 the stimulus will have brought unemployment down to below 7 ¼ percent.

            The sad reality is that far from creating jobs, the US economy has lost around 3 ½ million jobs since the start of this year. While it is true that there has been a moderation in the rate of job losses since the middle of the year, over the last three months the US economy was still shedding jobs at a pace of around 175,000 jobs a month. This latter pace of job loss was similar to that around the peak of the two previous recessions. As a result, by end-October unemployment had risen to a staggering 10.2 percent of the labor force.

            The present headline unemployment rate is now at practically the worst level in the post-war period. More disturbing still is the fact that the headline unemployment measure understates how grave is the current US job market situation. Involuntary part-time employment is presently increasing at more than twice the pace that occurred in previous post-war recessions, while around 55 percent of workers who have lost their jobs now do not expect those jobs to come back. Including discouraged workers and people involuntarily in part-time employment in the overall measure of unemployment, as does the Labor Department’s  U-6 unemployment measure, the unemployment rate today is at an alarming 17 ½ percent of the US labor force.

Across the board, US companies have been taking advantage of the chronic weakness in the US labor market to cut back on both wages and job benefits. This is now resulting in falling wages and stagnating incomes for most US households. With the labor market almost certain to remain weak in 2010, one has to expect yet further declines in wages and incomes.

While falling wages might be good for keeping inflation in check at a time that the Federal Reserve is pumping an unprecedented amount of liquidity into the banking system, it is hardly good for promoting a meaningful economic recovery. For without income growth, one cannot expect any pick up in household consumption, which accounts for as much as 70 percent of GDP in the United States. This would seem to be particularly the case at a time when the banks are cutting back severely on consumer credit and when US households are still reeling from the large losses over the past two years in the values of their homes and their equity portfolios.

Without consumption growth, the US economy risks experiencing a double dip recession next year once the beneficial impact of the fiscal stimulus package fades and once inventory rebuilding has run its course. Whistling in the dark as the Obama Administration is doing at a time when real downside risks threaten the US economic outlook is hardly the way to run the world’s largest economy. One has to hope that the Administration soon smells the coffee and seeks a mid-term correction in its economic policies before the economy experiences a double-dip recession and before an already dire labor market situation becomes even worse.   

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The Obama stimulus at best left total employment unchanged.  Start with the fact that according to the proponents’ own theory the “stimulus” in 2009 was not the 1.2 percent of GDP reflected by the signed legislation, but the 6.7 percent jump in the deficit-to-GDP ratio from 2008 to 2009.  Keynesians professing the benefits of automatic stabilizers somehow forget that Obama’s bill was less than a fifth of the “stimulus”.  Whatever the source, if Keynesian pump-priming really worked, 6.7 percentage points of stimulus should have the economy revving toward full employment by now.   1.2, 6.7, or 20 percent, though, are all equally ineffective.

This is not to argue that the cited 650,000 jobs were all phony.  Even granting the number is inflated, one ought to be able to identify a few jobs resulting from throwing a couple hundred billion dollars at the economy.  But the 650,000 figure only suggests the jobs created (or saved, as silly as that is), and tells us nothing about the jobs lost due to the “stimulus”.  A business that only focuses on gross income and forgets about net income fails quickly.

The problem with the idea of pump-priming the economy through deficit spending is that the government must first pump money out of the economy by borrowing it.  Government spending increases public demand; government borrowing reduces private demand.  Governments don’t create purchasing power.  They destroy it through inflation or transfer it through borrowing and spending.   

This isn’t an argument about the money being wasted.  Some of the funds did help families.  Some did go to useful projects that could provide long-term benefits.  Most of the money probably was wasted, but that’s not the point.  The point is – it did not lead to jobs in the short run.

Supporters sometimes reference “idle savings” as a justification, so government borrowing and spending does not reduce private borrowing and spending.  This suggests financial institutions are sitting on vast piles of saving idling on the economy’s sidelines.  To be sure, financial institutions have cautiously parked enormous sums in low-yielding investments.  But those sums are not idle.  They are invested.  They are cycled back into the financial system.  The only truly idle savings are found in mattresses and those savers are unlikely to be inspired to deflate their mattresses at the sight of massive government borrowing.

Proponents of Keynesian stimulus often fall back on vague references to closed economies and economies operating below full employment.  The closed economy response effectively admits the idle savings argument supporting Keynesian policy is specious and so proponents argue we can get the savings from abroad for government to spend.  Would that it was so, but even in the land of wishful thinking the balance of payments must balance.  If we import more saving on net to finance deficit spending, we must also import more goods and services – public demand up, net foreign demand down.

To be sure, Keynesian stimulus would have little appeal if the economy were operating at full employment, but rising unemployment does not render pump priming effective.   Citing the symptom does not provide a cure.  To move the economy toward full employment, producers need reasons to produce more, generating income that is used to buy stuff.  Keynesian stimulus ignores the first and second stages, and pretends that redistributing income changes the amount of stuff the income can buy.   

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Updated at 9:59 a.m. on Nov. 9.

I am astounded at the claim of my friend Charlie Calomiris that government spending under recession circumstances doesn’t create jobs.   Does he think that the increase in demand doesn’t raise aggregate output, because the federal debt crowds out private production?   That would be hard to believe, at a time when the Fed is keeping interest rates at zero, and long-term interest rates are also quite low.   The lecturing to Democrats about the evils of the national debt takes real chutzpah, after Presidents Reagan, Bush I and Bush II increased it ten-fold during times when no national emergency required it.

Of course the Administration effort to identify specific jobs is more a political exercise than an economic exercise;   the true number of jobs saved, relative to what would otherwise have happened is greater than the White House  numbers.   It is legitimate as a communications strategy to make the benefits concrete by pointing to the many teachers who probably would have been laid off by fiscally devastated state and local governments in the absence of federal government money.   But the exercise doesn’t count the effects of most of the stimulus spending.  

The problem of course is that one cannot estimate accurately, let alone prove, what would have happened otherwise.   Claims by Republican congressmen that one should judge Obamanomics by looking at whether employment is greater than before the stimulus was passed are nonsense.  If there hadn’t been a severe recession (starting on the predecessor’s watch, if you want to get political about it, as Charlie does), there would have been no need for the stimulus.   None of us claims that fiscal stimulus creates a lot of jobs on net when the economy is already expanding. (The increased government spending of the second terms of Presidents Reagan and Bush did not create a lot of jobs.)    The appropriate way to estimate the stimulus impacts is by means of a standard macroeconomic model with a fiscal multiplier in it.  But if you believe that fiscal multipliers are zero, even in a severe recession, then neither a standard macroeconomic model nor anything else will convince you.

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Washington thrives on phony numbers produced by political machines that need to make positive headlines (especially when the facts are so bad, as they are these days for the Democrat political machine). The 650,000 number is perhaps the phoniest number of all. As far as we know, the Administration's spending policies have had very little effect on the economy, and perhaps no effect. But economists can say with some certainty that we are suffering negative consequences from the President's pledges to raise taxes dramatically (in the form of higher marginal tax rates on income, and proposed taxation in support of healthcare and environmental initiatives), his protectionist actions and rhetoric, and his decision to pursue a politically motivated adversarial approach toward the financial system, which is now perpetuating and worsening the credit crunch (despite earlier Administration policies that were effective in bringing the worst phase of the crisis to an end). These policies will have and are already having a negative effect on investment and employment decisions, especially by small businesses who constitute the vast majority of jobs in the economy. The bad news is not just that we are suffering hard times, but that lasting improvements (beyond the inevitable spurt of growth in output for 2010) will be hard to achieve because the Administration is so hamstrung by its own ideological commitment to bad economic ideas. Phony facts won't change that unfortunate economic reality. Only elections will.

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Those dissecting the White House claim that the $200 billion spent on the stimulus has created or saved 650,000 jobs have focused on the arithmetical errors in counting the hirings. They are ignoring a much more fundamental issue. Before Congress could inject $200 billion into the economy, they had to borrow $200 billion out of the economy. So the more central question is thus:

***If injecting $200 billion into the economy supported 650,000 jobs, then how many jobs were lost by first borrowing that $200 billion out of the economy?***

The White House says zero. Their job numbers assume all $200 billion is “new” and supports jobs that would not otherwise exist.

This is absolutely implausible. How can adding $200 billion to one part of the economy create 650,000 jobs, but removing $200 billion from another part of the economy not cost a single job anywhere?

Some assert that this $200 billion is “new spending” because it was borrowed from “savers.” But that assumes the people who lent Washington the money would have otherwise saved exactly 100% of it. Even if one conservatively assumes they’d have saved half of it, it still means that only $100 billion would be “new” spending supporting new jobs. The other half merely replaced private spending/jobs with government spending/jobs. So cut the “jobs created/saved” figure in half.

But wait, there’s more. Even the money borrowed from savers isn’t “new money.” Savings do not fall out of the economy. They are invested or deposited in banks – which then lend them out to others to spend. Even when recession-weary banks hesitate to loan money, they invest it in Treasury bills instead. They don’t hoard customer deposits in massive basement vaults. Consequently, one person’s savings quickly finances another person’s spending. (And even foreign borrowing is financed by an increased trade deficit, negating the effect.) So borrowing from savers doesn’t add new spending either.

Thus, it is possible that *all* $200 billion in government spending (and jobs) merely displaced private spending (and jobs) dollar-for-dollar and job-for-job. And this is why the unemployment rate is not dropping.

The White House is telling us that adding $200 billion to one part of the economy created/saved 650,000 jobs, but removing $200 billion from another part of the economy has not cost a single job. They need to be taken to task for such implausible economics.

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