Shovel-Ready

In 2009 President Obama and the Democratic-controlled Congress passed an $800 billion stimulus package that was supposed to mitigate the impact of the recession.  There has been much debate about the effectiveness of the stimulus spending and the cost per job “created or saved.”  Other criticism focused on government’s failure to identify and fund shovel-ready jobs that would have improved and updated our infrastructure.  Much of the stimulus money helped fund state and local government positions for teachers, firefighters and other public employees.  It appears that the stimulus legislation did little, if anything, to stop the decline in certain types of construction employment, most notably street, highway and bridge construction.

Proponents of the stimulus package argue that public investments help foster greater economic growth.  Skeptics argue that projects are funded are based on cronyism and political paybacks rather than priorities for economic growth.  Economists on both sides of the argument should examine employment in private-sector construction industries during the recession and recovery.  Many Keynesian economists lament the fact that employment in state and local government has lagged during the recovery despite the stimulus package.  However, large increases infrastructure spending are not expected to result in big gains in public sector jobs.  Infrastructure investment will instead re-direct resources to private sector government contractors that build and repair the infrastructure.

The following chart shows the changes in quarterly employment in two of the biggest heavy construction industries: construction of utility systems (other than oil and gas pipelines) and construction of streets, highways and bridges.  Employment in both industries has been normalized to 100 as of the first quarter of 1990.  There are fewer employees building and fixing highways and bridges than at any time in the past 20 years.  Employment in street, highway and bridge construction is down 5.3% in the past two years and 18.5% in the past five years, and the share of total employment in this industry is at a record low.  Employment in the construction of utility systems dropped from 2007 through the end of 2009 and this industry has recovered almost 25% of its job losses.  In contrast construction in the booming oil and gas pipeline construction industry is up almost 35% in just two years.  This boom in energy construction is not the result of 2009 stimulus program, however.

 

Government spending largely redistributes resources through the entitlement system which is why the government budget is a much higher fraction of GDP than the public sector’s share of total employment.  Even when governments devote resources to infrastructure projects, the workers are typically private sector employees of government contractors.  Government spending over the past five years has been primarily on transfer programs and not infrastructure.  This is best seen by examining employment in the heavy construction industries.  Employment in highway and bridge construction is well below pre-recession levels and has even dropped in the past two years.  The situation is somewhat better for employees of firms that build and repair utility systems where about 25% of the job losses during the recession have been reversed.

Bailouts

For a baby boomer who grew up in the Midwest it is odd that questioning Mitt Romney about how generous he would have been with taxpayer help for General Motors is considered a winning issue for Democrats.  General Motors was the number one company in America for 22 of the first 25 years of the Fortune 500 list of the largest companies in America.  The only three years that General Motors was not number one was in the early 1970’s when gasoline prices spiked and GM ranked second to Exxon.  A Federal bailout of General Motors was as unthinkable in 1980 as it is today to imagine a presidential campaign in 2052 in which candidates argue about how much taxpayer money should have been used to bail out Apple or Google.

General Motors and successful tech firms in Silicon Valley have (or in the case of GM had) an advantage over their competitors based on their size and geographic location.  The important work of Paul Krugman, and others, explained that companies and countries can have an advantage over their rivals based on increasing returns and geographic concentration.  Google, Apple, Facebook and other tech firms in Silicon Valley have an advantage because of the available supply of engineers, software developers and programmers which lowers the cost of hiring and turnover.  For General Motors and other automakers in Michigan and Ohio, the advantage came from a location near parts suppliers and the suppliers of other intermediate goods and raw materials.

Krugman’s work explained that firms benefit when they are located near similar producers.  This is true for automakers in Detroit and tech firms in Silicon Valley.  When automakers in Detroit or tech firms in Silicon Valley fail the market test they have done so despite their advantages over competitors in other areas.  The bailout of financial institutions was based on a notion of “too big to fail.”  The systemic risks of allowing a large financial institution to fail were perceived to be too high; there would have been too much collateral damage.  The rationale for bailing out manufacturing firms advantaged by their size and proximity to key suppliers and human capital is much more sketchy.  It establishes a dangerous precedent for future recessions when other large American companies, who faced advantages similar to those enjoyed by GM, will also file for bankruptcy.

To Punt or not to Punt: Policy Advice based on Observational Data

Rocky Long, second year head football coach of the San Diego State Aztecs, is facing a problem that is similar, in some respects, to what voters face.  Coach Long may choose to never punt the football once the Aztecs cross midfield, regardless of distance on fourth downs.  He is listening to advice suggesting that the strategies of many previous coaches were wrong.  Coach Long says “We had one of our professors in our business school … go over a system we are thinking about using.  We’ll have a chart come game time that will determine what we do in different situations.”

Voters must decide whether the policies of another Obama Administration will help turn the economy around and contribute to more job creation, or if the Romney campaign proposals will be more successful in achieving these goals.  Football and economic policy advice are both derived from observational, not experimental, data.  It is difficult to know what might happen if alternative policies were to be enacted.  Analysts look to history, in similar circumstances with similar policy options, and hope this provides useful guidance.

Coach Long’s decision apparently follows the strategy of high school coach Kevin Kelley of Pulaski Academy in Little Rock, Arkansas who has been remarkably successful.  But college football is not high school football.  The strategy also appears similar to advice given by Berkeley macroeconomist David Romer, who several years ago found that NFL teams kick surprisingly often on fourth down.

Romer concluded that teams are not pursuing strategies that would maximize their chance of winning the game.  Romer may be correct, but we should be cautious because his study is based purely on observational data.  It is possible that the real world problem is more complicated than the model used to analyze the data.  Whenever economics (or other social science) professors explain that agents motivated by self-interest are making choices not in their self-interest, the professors may have mis-specified their model or may misunderstand the real-world problem that people are attempting to solve.

Romer’s paper is interesting, well written, and well executed.  All of the criticisms raised here are ones that Romer acknowledges, but they aren’t enough to sway his opinion and policy advice.  The data Romer analyzed indicated that NFL teams rarely try for a first down on fourth down.  The primary question is why?  Romer’s explanation is myopia.  An alternative explanation is that a failed fourth down attempt will shift momentum in the game.

The key problem with observational data is that it is difficult to calculate the expected outcome from counterfactual decisions and policies.  Romer argues that teams are not optimizing because he believes they would be successful fairly often on fourth down and two yards to go.  He concludes this despite rarely seeing teams attempting this play.  So how does Romer “guesstimate” the likelihood of success on fourth down and two?  He looks at outcomes of third down plays with two yard to go in the first quarter of games.  He uses first quarter plays because once enough game time has elapsed and the score is uneven, both teams will adjust their game strategies.  He assumes that third down strategies and outcomes are very similar to what would happen on fourth down plays (if they actually were to occur) because he doesn’t have enough data on fourth down plays.  Even if he observed more fourth down plays, they would not be a random or representative sample of teams and/or game situations.  Romer’s assumptions are made out of necessity, not because they are realistic or accurate.

It is also important to note that Romer’s empirical model does not allow for momentum.  The value of having possession of the ball with first down and ten yards to go on a given yard line (say midfield) in his empirical model is completely independent of how one reached that position on the field.  In the language of dynamic programming, the state variables for the optimization problem include down and yardage, but not the sequence of plays leading up to that point.  He imposes this assumption, as good applied economists often do, to make the problem tractable.  He recognizes that momentum could matter and makes some supplemental calculations to show that teams don’t perform much differently immediately after very bad plays (fumbles, interceptions, blocked kicks, and long kickoff and punt returns by the opponent) and just after very good plays (touchdowns) than they do after typical plays.  This is, at best, a half-hearted attempt to determine whether there is momentum in NFL games.  The model simply doesn’t take the idea of momentum shifts seriously, but avoiding these shifts seems to be a key reason why coaches kick field goals rather than go for it on fourth down.

Rocky Long, at San Diego State, may follow the advice of economics and business school professors and forsake the punt.  But he should do so understanding how the policy advice was determined.  It is extremely difficult for economics professors to evaluate counterfactual policies- whether it is a forecast of what will happen if teams ran and passed on fourth down or a “guesstimate” of the 2012 unemployment rate had there been no stimulus package in 2009. 

Asking economics professors, the Congressional Budget Office or other forecasters to evaluate alternative policies and predict what might happen over the next decade also has limited value.  Many of these same professionals either didn’t forecast the recession or underestimated its severity.  Government economists and advisors didn’t know how deep the downturn was until a year or two later when the data came in.  Mis-estimation of the recession in the midst of the downturn is the explanation given for the woefully inaccurate prediction that the stimulus would keep the unemployment rate below 8%.

It is unwise to rely too heavily on economists as authorities on counterfactual policies.  Economists can’t easily determine what would have happened had there been no stimulus, or how the economy might perform if taxpayers earning more than $200,000 were to face higher marginal tax rates.  In fact they struggle to measure output and employment in real-time.  Predictions about hypothetical economic policies are as fraught with error as predictions about fourth down decisions that have rarely been tried in the past.

Why Increasing CAFÉ Standards for Automobile Efficiency is a Mistake

The Obama Administration announced new regulations requiring automakers to sell cars and light trucks which average 54.5 miles per gallon by 2025.  This requires cars and light trucks to be twice as fuel-efficient as the current regulations in just 12 years.  President Obama has said:  “These fuel standards represent the single most important step we’ve ever taken to reduce our dependence on foreign oil.”  (The Keystone Pipeline might have reduced dependency even more but that was a step not taken.)   In contrast, a spokesperson for Mitt Romney said “Governor Romney opposes the extreme standards that President Obama has imposed, which will limit the choices available to American families.”

The more stringent standards are promoted as a way to reduce the demand for oil.  One way to do this is by reducing the demand for cars and driving but Bob King, President of the United Autoworkers, believes the new standards will make it cheaper to drive.  He said: “These new standards will help propel the auto industry forward by giving American families long-term relief from volatile fuel prices.  Lowering the total cost of driving will make automobiles more affordable and expand the market for new vehicles.”  Unfortunately it is quite likely that King is wrong and the more stringent regulations will increase the cost of vehicles and the cost of travel per passenger mile.

Motor vehicles contribute to traffic and air pollution (negative externalities) and use public roads.  Sensible policy includes gasoline taxes and vehicle registration fees.  It may be appropriate to raise gasoline taxes and vehicle fees if the perceived costs of the negative externalities caused by cars and trucks have increased.  It makes little sense, however, to double the fuel efficiency regulations for cars and light trucks by 2025.  The new regulations will have unintended consequences, including:

• A shift to the production of smaller vehicles that will make it more difficult for car pooling and result in even more vehicles with only a single passenger on our roads and highways.  Higher gas taxes would encourage more car pooling and reduce traffic.
• A delay in purchases of newer and more fuel-efficient (but more expensive) vehicles further increasing the average age of vehicles on the road.  Higher gas taxes would encourage people to trade in less efficient cars.
• Drivers will be encouraged to drive more often once they have incurred the fixed cost of  buying a new more efficient car.  Cars that achieve 54.5 miles per gallon will cause drivers to make more trips and increase traffic and congestion.  Higher gas prices cause drivers to economize on the number of trips and reduce traffic.
• A shift to the production of lighter and less safe vehicles.  Higher gas taxes make it more expensive to operate larger and heavier vehicles but families who value those features would still be able to purchase larger vehicles.

This is not to say that gas taxes should be raised but rather that higher gas taxes make far more sense than the new regulations which will cause families to delay trading in their older less efficient cars for newer more efficient ones.  The new regulations may make it impossible for soccer moms and dads to take their families and friends together in the same vehicle, will reduce car pooling and won’t reduce traffic and congestion.  Other than that it is a great idea.

The Misguided Focus on Green Jobs

The Bureau of Labor Statistics (BLS) counts the number of “green“ jobs in the U.S. economy and earlier this summer its methodology for determining whether a job was “green” came under fire in a Congressional committee hearing when we learned that oil lobbyists, antique store operators, and sales persons at used record stores are “green” jobs.  While it is appropriate for the BLS to measure employment in all sectors of the economy it is foolish to make an increase in “green” jobs a policy goal.  “Green” jobs represent the cost, not the benefit, of investments in cleaner energy technology.  The benefits of “green” investments are cleaner air and water.  The U.S. government should evaluate environmental policy by measuring improvements in environmental quality relative to the costs of achieving those gains.  The policy goal should be to achieve cleaner air and water at the lowest cost which typically means with fewer “green” jobs.  Even if the Obama Administration’s loan guarantee program created many new “green” jobs (which it didn’t) that would not make the initiative a success.  Small gains in environmental quality per job created (or dollar spent) is inefficient.  It is costly to divert resources to “green” jobs that provide little benefit to the environment.

A corollary to this argument is that we should not put high tariffs on solar panels imported from China to protect “green” jobs in the U.S. even if Chinese manufacturers are selling their products for less than the production costs.  Unfortunately this is precisely what is happening.  If Chinese manufacturers selling solar panels to the U.S. for less than cost is bad for our economy then receiving free solar panels from China must be extremely harmful.  Of course that is absurd.  If foreign producers are willing to (perhaps) foolishly subsidize the production of solar panels and sell them to us for less we should accept their gift.

Jobs are the by-product of wealth and value creation not a means unto themselves.  The value of cleaner air and water is not directly measured in GDP.  Clean air, rivers, and oceans are public goods and not traded in markets where prices reveal marginal valuations.  (Of course solar panels and windmills are traded in markets and if it is profitable for U.S. companies to sell these products overseas, without subsidies from the U.S. government, more power to them.)  The additional costs of generating cleaner energy, including the wages and salaries paid for “green” jobs, are included in GDP.  However, investments in new energy technologies can be expensive but not valuable; Solyndra is a notable recent example.  As long as our goal seems to be the creation of more “green” jobs, whatever the cost, we will continue to make errors in environmental policy.

Delaying Retirement and the Inexorable Growth in Entitlement Spending

Neither political party appears likely to support entitlement reform if it means reducing benefits for the current generation of retirees or those approaching retirement age.  Although economists are correct to point out that the growth in entitlement spending presents a huge challenge, seniors care about the financial burdens facing their children and grandchildren and can take private actions to mitigate the damage caused by inactivity in Washington, DC.  Seniors can delay retirement, work longer, save more, and leave more in bequests to their children and grandchildren who are likely to face higher taxes and reduced benefits.

On Bloomberg View Professor Laurence Kotlikoff, a one-time candidate for President of the United States, warned that “expanding Social Security, Medicare and Medicaid benefits, shifting the structure of the tax system to lower the burden on retirees relative to workers, and cutting taxes have all saddled the U.S. with unsupportable obligations.”  He also argued that a solution to this dilemma should include a reduction in the Social Security and Medicare benefits of today’s elderly.  Without such sacrifices Kotlikoff calculates that we are likely to leave “future generations to cover what now amounts to a $222 trillion fiscal gap between future expenditure and taxes.”

Lawrence Summers, Harvard professor and former director of President Obama’s National Economic Council, explained in the Washington Post that 32% of the federal budget is devoted to supporting those over 65.  He also warned that the ratio of individuals age 65 and above to those of working age “will rise from 1 for every 4.6 workers to 1 for every 2.7 over the next generation.”

Adam Ozimek at Modeled Behavior has suggested that one way to mitigate the impact of the aging baby boom population is to increase (skilled) immigration among the working age population.  This can and likely will be part of the solution.  However, Ozimek calculates that immigration would have to more than double for the working age population to increase as much as the elderly population (in sheer numbers), and immigration would have to increase by more than 600% for the ratio of workers to retirees to remain constant.  Again, this seems unlikely to occur.

Some older current retirees and early generations of retirees, who worked between the 1950s and 1980s, were often entitled to receive more (in present value) than they contributed to the Social Security and Medicare system.  These parents of baby boomers have already received most if not all of their entitlement benefits.  In a pay-as-you-go system payroll taxes on their children and grandchildren financed part of their Social Security and Medicare benefits.  The magnitude of Social Security’s potential intergenerational transfer varies from decade to decade.  During the 1950s, a worker with the median (male) earnings paid an average payroll tax rate of 3.8% (half matched by their employer).  Because maximum taxable income in the 1950s was slightly above median earnings, a worker earning twice the median (near the top 10% of earners) paid an average tax rate of 2.22%.  The following chart shows that average tax rates increased dramatically from 1950 to 1990.  Since 1980 there has also been no difference in the average payroll tax rates paid by nearly all workers, regardless of their income.

Although it is doubtful that either political party will support entitlement reform that reduces expected benefits for adults age 60 and above, seniors can make sacrifices for their children and grandchildren without Congressional action.  If older Americans internalize the financial burdens of their children and grandchildren (Ricardian equivalence) they will not view the political failure to reduce current benefits as an increase in their family’s wealth.  They will work longer and save more to leave as bequests.  Larry Summers wrote that it is unlikely that increased labor force participation of seniors will be enough to counteract the demographic changes we face, but the aggregate effects of these private financial sacrifices can be substantial.

Over the past two decades the labor force participation rates of men and women age 60 and above increased by about 30 percent.  There are 3 million more adults in their sixties in the labor force than would have occurred if labor force participation rates remained constant.  Part of this, no doubt, is due to increases in health and life expectancy of seniors.  For the average 65-year-old man two more years of work now represents only 11.4% of his remaining life.  For the average 65-year-old woman two more years of work represents less than 10% of her remaining life.

Responsible behavior by seniors can mitigate the failure of the President and Congress to make serious reforms to entitlement programs.  Unfortunately these private efforts probably won’t be enough to close the gap in entitlement funding faced by future generations.  But if tens of millions of seniors delay retirement and save more over the next two decades it will surely help.

Forward? More on Inefficiency in Government

Economic advisors who advocate Keynesian policies must convince voters and taxpayers that more government spending will stimulate economic recovery.  Since many government spending programs just divert resources from one activity to another, it would be helpful if advisors advocating a bigger government sector could point to programs that work, i.e. where the benefits exceed the real opportunity costs.  Although it is difficult to identify and accurately measure all of the benefits to many government programs, when voters and taxpayers see obvious waste and inefficiency it is harder to make the case for more government spending.

Like many residents of Northern Virginia I observe the inefficiency of the Washington DC public transportation system on a daily basis.  I have boarded the morning train at Rosslyn during rush hour hundreds of times over the past two years.  Orange line trains arrive from the west, Blue line trains arrive from the south, and either train takes riders downtown.  Ask anyone at the Rosslyn station on a weekday morning and they will tell you the same thing: Orange line trains are predictably over-crowded and often it is impossible to board due to a lack of space.  Blue line trains always have space and often one can find a seat.

Clearly there aren’t enough Orange trains running in the morning relative to Blue trains.  This is inefficient.  Transportation costs can’t be minimized if there are predictably fewer passengers per train on Blue lines than Orange lines during rush hour.  This should be obvious to management at the Washington Metropolitan Area Transit Authority (WMATA).  Although reallocating trains may represent a small cost saving there is no reason to remain inefficient.  The fare changes (it costs $1 more for a paper ticket) have shifted nearly all rush hour commuters to a plastic Smart Card that tracks movements throughout the WMATA system.  If taxpayers can’t trust the government to run operations like WMATA efficiently, the case for more government spending is much less convincing.

The inefficiency at WMATA is seen in many other government agencies and in many public institutions.  The next time public college university administrators complain about the shortage of classroom space and advocate for more infrastructure spending they should be required to show how efficiently classroom space is currently being used.  On most college campuses classrooms are less utilized early and late in the day, and on Monday-Wednesday-Friday relative to Tuesday-Thursday (let alone when comparing summer to the traditional school year).  Colleges and universities should use their current physical plant efficiently before taxpayers are required to spend for more space.

The big debate in this fall’s Presidential election will be over the proper size and scope of government.  Regardless of the outcome of that debate, politicians and bureaucrats should be held responsible for waste and inefficiency in spending programs.  There is no doubt that we can’t fix our fiscal problems just by reducing waste and inefficiency in government.  But wasteful government spending diverts resources from more productive uses and will not help an economic recovery, regardless of what some advocates might say.

Political Pork and (Davis) Bacon

President Obama, while campaigning in Iowa, announced $170 million in Federal meat purchases, including $100 million of pork, to help offset the expected decline in prices caused by this summer’s drought.  Ranchers have been slaughtering more animals rather than paying higher prices for feed this summer.  The shift in supply is driving meat prices down.  The President explained that the government plans to purchase more meat now at lower prices and freeze the meat  for later use, adding  “we’ve got a lot of freezers.”

The government should take advantage of lower prices for the commodities it buys because it reduces the cost of government.  It would be nice if these policies could be extended to construction labor hired for government projects.  Unfortunately the Davis Bacon Act keeps the cost of construction labor artificially high even as millions of construction workers remain unemployed or under-employed due to the collapse of the residential housing market.  For example, Federal law mandates a wage of at least $75 per hour for electricians and $71 per hour for plumbers in the city of Philadelphia for government construction projects.  Surely there are underemployed construction workers in Philadelphia who are willing and able to work on infrastructure projects for only $50 per hour.

The argument that the Federal government should intervene in commodity markets in order to dampen price fluctuations is dubious.  First, low prices are generally bad news for producers but good news for consumers.  Any government attempt to manipulate prices won’t benefit both buyers and sellers simultaneously.  (Price controls can however harm both producers and consumers).

Second, commodity producers can easily hedge against price declines by participating in futures markets (and taking a short position).  Purchasers can hedge against price increases by taking the opposite (long) position in the futures market.  For example, Southwest Airlines benefited from hedging against airplane fuel price increases when fuel prices were increasing, but lost out on their “insurance” when fuel prices fell.  The Federal government should not attempt to manipulate commodity price fluctuations when market participants could have hedged their positions in organized (and regulated) futures markets.  Nor should there be government intervention to limit the financial impact on companies from fluctuations in interest rates and the value of foreign currencies.  Companies can hedge against this volatility if such “insurance” is worth the expected cost.

Finally, if the goal is simply to lower the price of livestock feed there are better policy changes to consider.  First, as noted by the Washington Examiner, Federal energy policy now diverts billions of bushels of corn (representing 40 percent of domestic production) to the production of ethanol.  Second, our policy to tax imported sugar diverts hundreds of millions of bushels of corn per year to the production of high fructose corn syrup, a sugar substitute.  The Federal government should pursue smarter energy policies and eliminate sugar tariffs that protect sugar beet producers from foreign competition.  These policy changes would lower the artificially high price of corn and provide welcome relief to ranchers facing even higher feed prices due to the drought.

Forward?

I am not a political consultant, but if I worked for President Obama’s re-election campaign I would be concerned about the impression commuters in northern Virginia might be forming about the campaign’s “Forward” slogan.  “Forward” is also the slogan used by the Washington Metropolitan Area Transit Authority (WMATA) to explain why it is taking so long to repair the escalators at WMATA stations.  The sign on an escalator at the Rosslyn station pictured above indicates that it will take from July to October to repair.  To some commuters the unreliable escalators in Metro stations, and the length of time it takes to repair them, may symbolize inefficient and wasteful government spending.

The connection between public investment in projects like WMATA escalators and President Obama’s reelection campaign was reinforced when the President told us that successful small business owners and entrepreneurs owe credit for some of their success to public investment in transportation infrastructure.  Recall that one month ago today in Roanoke, Virginia, President Obama said:

If you were successful, somebody along the line gave you some help…. Somebody invested in roads and bridges.  If you’ve got a business — you didn’t build that.  Somebody else made that happen.

There is no doubt that many transportation infrastructure projects have benefits that far outweigh their costs and require both public and private investments.  Other projects, promoted by politicians from both parties, are laden with political pork.  Still others, like WMATA escalators, are valuable to the community but seem to be completed at a glacial pace (and probably exorbitant cost).

Virginia is an important swing state, and the President must do well among independent voters in northern Virginia to carry the state.  I suspect that few of the independent voters credit much of their professional success to the efficiency of WMATA.  The President is correct in saying that these independent voters didn’t build the Metro system or its escalators, but they are also not responsible for the system’s inefficiencies and state of disrepair.

Stimulating Reading: How Ezra Klein’s Wonkblog is Helping the Romney Campaign

Earlier this week Ezra Klein’s Wonkblog in the Washington Post published an article titled “The Romney campaign says stimulus doesn’t work.  Here are the studies they left out.”  The article criticizes a Romney campaign paper by Glenn Hubbard, Greg Mankiw, John Taylor and Kevin Hassett for its selective references of empirical studies of the Obama Administration’s American Recovery and Reinvestment Act (ARRA).  The Wonkblog article, posted by Dylan Matthews, provides a list of 15 papers (most of which have not yet been peer reviewed) and claims that 12 of them find that the ARRA “worked.”

I decided to read a few of these studies to see how much empirical support there was, in the academic community, for the idea that the ARRA was effective.  I read four of the papers, and so far, I am underwhelmed by the empirical evidence.

I read three of the papers listed by Wonkblog as providing evidence that the Obama stimulus worked.  The first, by James Feyrer and Bruce Sacerdote estimated the impact of the ARRA on jobs at the state and local level.  They find that the ARRA had some impact on jobs but estimated that the cost of each job created was between $170,000 and $400,000.  In addition, they find that different types of spending have different effects on jobs.  For example they report that spending “to fund teachers and police have if anything a negative impact.”  In general, their results are supportive of the study by John Cogan and John Taylor that found that state and local governments used Federal stimulus funding to reduce borrowing rather than increase hiring.

Feyrer and Sacerdote cleverly control for the statistical problem that stimulus spending is generally larger in places where the economy is worse through a technique called “instrumental variables.”  Their study validates what many ARRA critics have asserted: the ARRA was in large part pork barrel spending.  They find that states where members of Congress have longer tenure in Washington received more stimulus spending.  Their study uses this variation in pork barrel spending to estimate the effectiveness of the ARRA.

A second paper listed by Wonkblog under the “stimulus works” category is “Measuring Tax Multipliers: The Narrative Method in Fiscal VARs” by Carlo Favero and Francesco Giavazzi.  This paper has nothing to say about the effectiveness of the ARRA; it relies on data through the first quarter of 2007.  (The purpose of the article was to reconcile two different methods for estimating the impact of tax cuts or tax increases on economic activity.)

A third paper listed as supportive of the ARRA is “Fiscal Policy Multipliers on Subnational Government Spending” by Jeffrey Clemens and Stephen Miran.  Again this paper has nothing to say about the effectiveness of the ARRA; it relies on data through 2004.  It is fair to say, however, that the authors find low multiplier effects of government spending programs, perhaps due to crowding out of private expenditures.  They state:

“our relatively low multiplier estimates (based on deficit-financed government spending) can be reconciled with the larger estimates in several recent studies (based on windfall-financed government spending) if government debt crowds out current private consumption and investment. We view these contrasting, but not contradictory, results as evidence of an important role for neoclassical considerations.”

Finally “The American Recovery and Reinvestment Act: Public Sector Jobs Saved, Private Sector Jobs Forestalled” by Timothy Conley and Bill Dupor finds that the ARRA had a slight positive effect on public sector employment and a slight negative effect on private sector employment.  They report that the largest declines in private sector employment were in health, education, and private business (HELP) services.  In particular they report that government employment increased by between zero and 900,000 jobs and private HELP service employment decreased by 166,000 to 1,378,000 jobs.  They report that ARRA had a negative, but insignificant, effect on private sector jobs in goods-producing industries.  Taken together, Conley and Dupor find the ARRA had no statistically significant positive impact on overall employment, and may have actually reduced employment.

 Dylan Matthews and the editors at Wonkblog apparently don’t understand what it means for a study to find no significant effect of a policy.  The Wonkblog article states “The biggest problem with the Conley and Dupor study is that their estimates are not statistically significant.”  What is true is that any study of the ARRA will be fairly imprecise and have limited statistical power because of a small sample size and the methods required so that estimates don’t obviously suffer from endogeneity bias.  Given the statistical precision of their study, Conley and Dupor could have detected a statistically significant increase in jobs in service-producing industries as small as 1.5%, if such an increase had occurred.  Conley and Dupor most likely found no positive effect of the ARRA on private sector employment because the stimulus was either ineffective or had such a small effect that it could not reliably be measured.

I have more reading to do, but my initial reaction is: two studies had nothing to say about the effectiveness of ARRA, one study found no positive effect on employment at all, and the other gave mixed results.  Even the study with mixed results found that the ARRA cost hundreds of thousands of dollars per job created and that the stimulus resembled political pork: spending was higher where Representatives had more tenure in Congress.  My primary conclusion is that Wonkblog has helped the Romney campaign by calling more attention to academic studies questioning the efficacy of the Obama Administration’s economic policies.