Effects of government spending on the economy
A couple of years ago I read that $1,000,000 spent on education creates eight times as many jobs as $1,000,000 spent on the military.
I unfortunately can’t find the source, but the converse is pretty obvious: when the US and the states cut back on education funding and schools fire employees, that adds to unemployment. Then the government pays more unemployment benefits and collects less tax money, and then the the schools get less help and fire more public employees. That cycle doesn’t seem to be working very well, does it?
Anyhow, the effect of each $1,000,000 is the sort of information we need when gauging the effect of government spending.
A note in the May-June 2011 Miller-McCune magazine, “Did the Stimulus Quench America’s Economic Thirst,” gives more such data.
The accompanying graphicis full of interesting details which you can’t see well online:
In the download, you’ll see (upper right corner) that unemployment rose after the tax cuts of 2001, fell after the cuts of 2003, rose after the TARP of 2008 and stimulus of 2009, and then fell slightly.
What seems more significant is the expected effect (according to the Congressional Budget Office, which is supposed to be as objective as possible) of different elements in the 2009 stimulus, over the years 2010-15.
The bottom of the graphic estimates the cumulative effect on the GDP for each dollar spent by the government.
If the high CBO estimates are right, six of the eleven measures studied will increase production and employment more than the funding invested. Those six are, in downward order,
Increasing aid to the unemployed
Reducing employers’ payroll taxes for firms that increase their payrolls
Investing in infrastructure
Reducing [all] employers’ payroll taxes
Providing aid to states for purposes other than infrastructure
Allowing full or partial expensing of investment costs
However, if the low estimates are right, all eleven measures will cost more than they are worth.
By both estimates, the worst investments are:
Extending higher exemption amounts for the Alternative Minimum Tax
Reducing income taxes in 2011
Even in the high estimate, those are worth only 50 cents on the dollar invested.
“…spending on unemployment is an excellent way to get stimulus spending stimulating quickly, while reducing income taxes going forward is among the slowest. Reducing employee payroll taxes — think of the 2 percent reduction in Social Security withholding in the U.S. this year — falls roughly in the middle.
I would have thought that spending on infrastructure would be the best, as it creates jobs and accomplishes useful projects; but I guess that’s a slow process.
Also, as we found out, infrastructure is not always made in USA; see “Bridge Comes to San Francisco With a Made-in-China Label,” New York Times, 6/25/11:
“SHANGHAI. Talk about outsourcing. At a sprawling manufacturing complex here, hundreds of Chinese laborers are now completing work on the San Francisco-Oakland Bay Bridge…. At $7.2 billion, it will be one of the most expensive structures ever built. But California officials estimate that they will save at least $400 million by having so much of the work done in China. (California issued bonds to finance the project, and will look to recoup the cost through tolls….
I can see that giving money to the unemployed is the most stimulating: people who don’t have jobs are going to put whatever you give them right into the local economy.
I can also see that reducing individuals’ taxes is pretty indirect. Many of them will save the money in the bank or use it to pay banks for mortgages or credit debt, and we have seen that banks are holding on to big money rather than hiring new employees.
In sum, it seems stimulus spending can be worth it in selected areas, whereas cutting individuals’ taxes is not.