The Wall Street Journal and the question: Did the Stimulus work?

The Wall Street Journal authored an editorial today titled “Why the Stimulus Failed” in which they cite a new study which they claim reports that the stimulus failed to deliver jobs. They could not be more wrong about this study and what economic literature says about the stimulus. The authors of the study interviewed businesses that had received stimulus funds, asking who had been hired by those firms with stimulus funds. The WSJ believes this study proves:

The lesson of such on-the-ground knowledge is that the stimulus was a lost opportunity. In practice it became a shotgun marriage between an economic theory justified by computer models and 40 years of liberal social priorities (clean energy, Medicaid expansions and the rest). This produced the 9.1% unemployment we now have.

Woah, woah, the stimulus produced our unemployment rate??? Was the editorial board at the WSJ  asleep during that little thing called the financial crisis? Now I’m not economist, but I think THAT may have been what caused our unemployment rate to grow this large, especially considering the fact that no credible study (certainly not the one they cite in their editorial) has ever shown that the stimulus cost the US jobs.

So what does this study show? To start with, the Mercatus Center’s study is not a comprehensive examination of the stimulus. In total, the $800 billion stimulus is estimated to have saved or created 2.5 to 4 million jobs. The authors of this study are only looking at the new (as opposed to the saved jobs) that resulted from the direct government spending in the stimulus. This is important because they never look at the third of the stimulus that was made up of tax cuts and they never look at the jobs that were saved because of the stimulus. Of the third of the stimulus that they did look at, the authors found:

Hiring isn’t the same as net job creation. In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations after January 31, 2009, were unemployed at the time they were hired (Appendix C). More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%)(Figure 2). Thus, there was an almost even split between “job creating” and “job switching.”

Of course another way to look at this (as Jonathan Chait points out) is that firms were over four times more likely to hire the unemployed as the employed (since 90% of our workforce is employed  and 10% unemployed). Chait also asks (his article is worth the read): What do the authors “think happens when a new job is filled by moving a worker from another job”? The person who “job switches” probably got replaced by their old firm after another firm hired them with stimulus funds. Job-switches can be jobs-created as well!

Contrary to the beliefs of the WSJ, the stimulus was not just something dreamt up in Paul Krugman’s computer and then justified by mathematical algorithms at the CBO. There have been many studies that have used various methods to study the entire effect of the stimulus as a whole. This lazy editorial board could have done the work to find these studies, but doing so would not have helped them to make their biased, partisan point. Here is a listing and an evaluation of nine different studies of the effect of the stimulus. As a whole, they agree that it worked.

But don’t let facts get in your way, WSJ,  what would you have done as the economy was crashing around us in early 2009?

The economy would have benefitted far more if the government had instead improved the incentives for people and businesses to invest, produce and grow.

Well, doesn’t lowering taxes and giving businesses lucrative government contracts “improve their incentives  to invest, produce and grow?” Or does the WSJ just think that the Obama administration should have passed fewer regulations than the Bush administration did? Of course, the Obama administration did all of those things in 2009. So, can someone please tell me if they see the WSJ’s integrity laying around anywhere? They seem to have lost it.

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