Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Pres. Obama's $787 Billion Recovery Act Has Produced Few Sustainable Jobs
On Feb. 13, 2009, Congress passed the $787 billion American Recovery and Reinvestment Act of 2009 (ARRA), commonly referred to as Pres. Obama’s economic stimulus plan. As of May, 2010, about 62% has been paid out. According to Prof. Romer, the Chairman of the Council of Economic Advisers, the act has saved or created 2.5 million to 3.5 million jobs. If the purpose of the act was to save some jobs, it may have succeeded. Indeed, analysis of the expenditures suggests that the act was poorly conceived. If its object was to create jobs and promote a recovery, it was a complete failure. The employment data of the Bureau of Labor Statistics as the following table shows does not evidence any net job creation. The number employed fell by 3.0 millions from March 2009 to December, 2009 and increased just over 1.1 million by the end of March, 2010 for a net job loss of 1.9 million jobs.
The act has three broad categories of expenditures: tax benefits; contracts, grants, and loans; and entitlements. As the following table shows, $488 billion, 62%, was paid out as of June 10, 2010.
The Recovery Act, which Pres. Obama left to Congress to write, expended millions on entitlements like the Making Work Pay Tax Credit, tuition credits up to $2,5000, the First-Time Homebuyer Credit - up to $8,000, a Sales Tax Deduction for new Vehicle Purchases, Unemployment Benefits - up to $2,400 tax-free, and a child tax credit of up to $1,000 per child, etc. Presumably these stimulate consumption but it takes a stretch of imagination to see how these create jobs, let alone permanent jobs.
According to the GAO, as of May 7, 2010, $114.8 billion, or 41 percent of the approximately $282 billion of total Recovery Act funds for programs administered by states and localities, had been paid out by the federal government
According to the President’s Council of Economic Advisers, the public investment components of the Recovery Act were expected to spend out more gradually, because they typically require planning and are often awarded through a rigorous competitive process. By the end of June, 2010, roughly two-thirds of the public investment funds included in the Act had been obligated, and about $86 billion had been “outlayed”. Expenditures on public works create jobs that are temporary and not permanent. With so many pieces of machinery idled by the recession, they are unlikely to have significant multiplier effects.
Other grants and loans consisted of aid in the form of grants to states, school districts, and local governments which were experiencing financial difficulties. Most of what they spent the money on were regular items in their budgets. Their deficits were assumed by the federal government and became the latter’s deficit, a change without a difference. It did not create any jobs. Did it save jobs? Probably, but temporarily. What will the states and school districts do next year?
Billions were allocated for education, health care and entitlements such as extending unemployment benefits but none of them created any new jobs to speak of. Very few of such expenditures create sustainable jobs. They supplement incomes, ameliorate pain, and help support individuals and households, but none of them really create anything like factory jobs which are what is necessary for the economy to really grow. Saying that the expenditures saved or created jobs does not mean recovery. Multiplier effects are needed and only increased sustainable factory jobs will do that. To make matters worse, there is no reduction in unemployment in sight. To the contrary, the economy continues to lose jobs judging by the new applications for unemployment compensation.
The problem is that Obama’s stimulus plan has no legs. There is little stimulus in the stimulus plan. About 60 percent of the $787 billion authorized has been spent. The amount remaining to be spent is just enough to keep the economy moving sideways. That may be enough to prevent the economy from experiencing a double-dip this year.
The Council of Economic Advisers (CEA) points out that roughly $90 billion of the total budget impact of the Recovery Act falls into the category of energy conservation and promoting alternative sources of energy. The CEA estimates that these investments have directly saved or created approximately 52,000 clean energy jobs as of the fourth quarter. Moreover, according to the CEA, these outlays increased by more than 50 percent between the first and second quarters of this year. The act involves spending but it is not the right kind of spending. Without continued subsidies for decades, the production of energy from wind and solar cannot be sustained. The inefficiency of subsidies will cost jobs not create jobs as Spain’s experiment with alternative sources has already shown.
The CEA cites as evidence of job creation the fact that real GDP began rising in the third quarter of 2009, and job losses in the fourth quarter were one-tenth their size in the first quarter and suggests that the Recovery Act played a key role in this change of trajectory. This growth does not appear to be sustainable which is why so many are concerned about a possible double dip. There was no significant increase during the first and second quarter of 2010. Indeed, the employment data shown above does not indicate any growth in employment at all from March, 2009 to March, 2010. All that seemed to have happened is that 2.3 million workers dropped out of the labor force and unemployment increased in 2009 and decreased somewhat during the first quarter of 2010. Unfortunately, the number of employed remained more or less constant during the second half of 2009 and the first quarter of 2010. Not very much to crow about.
What is very sad is that President Obama and his principal economic advisers -- Summers, Geithner , and Romer did not come up with a plan to create more factory employment. If they weren’t free trade ideologues, they would have noticed that the trade deficits were responsible for the loss of 5 million or more manufacturing and industrial jobs and that to increase exports to the level of our imports would take 8 million. They found jobs in the service industries at lower wages, causing wages to stagnate and worsening the distribution of income. Thanks to environmental extremists, prohibitions on drilling for oil and gas on public lands and now, in the Gulf of Mexico as well, cost another million or so jobs and were and are preventing an economic recovery.
The Obama administration appears to be anti-business. There is little investment in new factories. There is almost nothing in the stimulus bill to encourage traditional manufacturing. As we noted recently, citing Andy Grove former CEO of Intel, Silicon Valley entrepreneurs produce few of their products in this country. The result is that for every worker they employ in this country, ten jobs have been created abroad to produce their products.
We suggested on this site, very recently, that a dramatic turnaround was necessary and suggested eliminating the corporate income tax and integrating the corporate and personal income taxes and/or substitute a value-added tax for the corporate income tax. It would help level the playing field for American manufacturers since most countries rebate their value-added tax to their exporters while, under international trade rules, the corporate income tax cannot be rebated.
We also suggested eliminating the restrictions on drilling for oil and gas on public lands. Drill, drill, drill means jobs, jobs, jobs.
We have tremendous reserves of natural gas. Most of our large trucks and buses should be converted to run on natural gas as T. Boone Pickens has recommended. This would create jobs and lower costs and reduce our dependence on foreign sources of oil.
As an immediate measure, we advocate a revenue-raising tariff on imports from countries with which we have large chronic trade deficits, China, Japan, Germany, OPEC, and others. While bringing trade into reasonable balance, we’ll gain billions in revenues not waste billions on a faulty stimulus plan. America would once again be an attractive place to produce manufactures. American industry would begin to create once again millions of productive jobs.
There are other dramatic things we could do. We should consider legalizing and taxing drugs. This would not only help empty our prisons and save us billions of dollars ending an unwinnable war on drugs but create hundreds of thousands of jobs.
Let’s end legislative foolishness and get on with responsible actions that will create productive jobs for our millions of unemployed who are unemployed as a result of foolish laws.
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