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Stimulus II Won’t Work, Either


President Obama won’t use the “stimulus” label to describe his nearly half-trillion-dollar jobs bill, but that refusal can’t hide the fact that he has no idea how economies recover from recessions. “Stimulus” is a tainted label because his $800 billion bill in 2009 was a failure. His economic team promised that passing that bill would keep unemployment from exceeding 8 percent. The bill passed, and unemployment climbed to more than 9 percent and has stayed there ever since.

With election day only 14 months off, one can readily see Obama’s desperation for a job program.

The administration insists things would have been worse without the stimulus bill, but no good theory supports that assertion. Here’s the key: “Stimulus” implies that something enters the economy from outside, like a defibrillator applying an electrical shock to the heart. But any money the government appears to inject into the economy was already in the economy and therefore was just moved around. If the government cuts taxes but keeps spending, no net addition of resources is made. Its borrowing and its new taxes have to come from somewhere.

As George Mason University economist Russ Roberts says, government’s stimulus of an economy is equivalent to taking water from the deep end of a pool and pouring it into the shallow end.

Did the first stimulus create or save 3.5 million jobs, as the administration claims? It depends on what you mean by “create,” “save,” and “jobs.”

It is certainly true that the federal government gave money to the states and localities, and some of that money was used to pay teachers, police officers, and firefighters. However, saying the money “saved” those jobs implies they really would have really vanished without federal money. In some cases, state and local politicians may have been engaging in fear-mongering. It’s happened before. But even if they weren’t, the claim assumes that if federal money hadn’t materialized, those politicians wouldn’t have found other things to cut in order to keep paying the teachers, police, and firefighters — the bloated administrative bureaucracies, for instance. We’ll never know because they were relieved of the necessity — the mother of invention — of making the “tough choices” they always say they are elected to make.

What about other jobs? Two recent studies by Garett Jones and Daniel Rothschild of the Mercatus Center demonstrate that most of the jobs were filled by hiring people away from jobs they already held. “[Hiring] people from unemployment was more the exception than the rule in our interviews,” the authors write. Some will claim that that is fine because the vacated jobs were available to the unemployed. But that implies highly skilled people were sitting around waiting for those jobs, and that is not the case. Moreover, the companies that lost employees had to incur high search and training costs to refill the jobs.

Supporters of Obama’s latest stimulus claim that repairing bridges and schools will put the unemployed to work. But it won’t happen because the unemployed aren’t typically qualified for such work. The thinking behind stimulus plans presumes that labor is easily interchangeable. It’s not. As one employer put it, “[The] type of construction home builders are trained for has nothing to do with bridges.” The federal government has increased infrastructure spending for 25 years, and Japan tried to jump-start its economy for 10 years with such projects. No economic miracles occurred.

There’s a deeper point. In economics a job is employment that creates value by helping to transform resources from a less-useful to a more-useful condition. In a free market, prices, consumer behavior, and profit-and-loss sheets signal whether that criterion is met. A job is not merely exertion for which someone is paid. In the case of government and government-financed jobs, where resources are acquired by force (taxation) and there is no market pricing at every stage, we can’t be sure that people who “work” actually create rather than destroy value. They may sweat, but they that doesn’t mean they have jobs.

So, then, how does an economy recover? Free people create economic growth when government backs off and lets them correct the mistakes induced by earlier monetary and regulatory stimuli. Nothing less will work lastingly.

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.