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State of the Stimulus

Tuesday, November 10, 2009

One reason unemployment continues to rise may be that stimulus funds did not target high-unemployment states.

On Friday, the Labor Department announced that the national unemployment rate rose by 0.4 percentage points to 10.2 percent. This increase is larger than expected for October and represents the highest unemployment level in 26 years. However, this is probably not the end of the unemployment rate’s upward trend. One reason may be that the stimulus funds did not target high unemployment states.

Using numbers from the administration’s website Recovery.gov and September 2009 labor force data from the Bureau of Labor Statistics, the chart below plots the number of jobs created for each 100,000 people in every state’s labor force and the corresponding unemployment rate in that state.

deRugy chart 11.9.09

The solid green line estimates what the number of jobs created or saved should look like if the administration were allocating relatively more money to the states with higher unemployment rates and if that money, in turn, created more jobs.

However, the data show that this is not the case. The chart shows that many higher-unemployment states (the states on the right) saw similar numbers of jobs created as lower-unemployment states (the states on the left), or even worse, saw relatively fewer jobs created.

Michigan is a good case in point. The state has a 15.3 percent unemployment rate, the highest in the country. So far, the Obama administration claims to have created or saved some 466 jobs per 100,000 members of the labor force in Michigan. That’s roughly the same number of jobs created by states with lower unemployment, such as New Jersey. And there were fewer jobs saved or created in Michigan than in California, Washington, or Montana—all states with relatively lower unemployment.

The data show that much of the money has been allocated randomly among states without regard for the level of unemployment in those states.

Now let’s look at North Dakota. With a 4.2 percent unemployment rate, there were roughly 356 jobs saved or created—more jobs than many states with much higher unemployment.

This suggests that there is no real correlation between unemployment rates in the states and the number of jobs “created or saved” with stimulus money.

This lack of correlation could be explained in several ways. First, perhaps the causes of Michigan’s high unemployment rate cannot be countered just by spending money. In other words, structural factors (such as tax rates, regulations, or labor laws) in the state could mean that more money is needed to create a job in Michigan than it takes to create a job in, say, Montana (if so the best way to create jobs in that state would be to address these underlying factors of unemployment).

Another reason could be that stimulus funds are being allocated without any connection to the level of unemployment within states. If government spending could in fact create jobs, then the problem of unemployment could have been mitigated by distributing funds to states based on their relative unemployment levels.

Reports have shown that the stimulus funds have been used to pay for employees whose jobs were never in danger.

Finally, the money could be properly allocated but states are wasting it, hence not creating enough jobs.

The reality is likely at the crossroad of these three explanations. First, the data show that much of the money has been allocated randomly among states without regard for the level of unemployment in those states.

Second, much of the money has been spent to close budget gaps in the states, which often means keeping union-protected school teachers in their jobs and paying for public-sector jobs rather than creating jobs in the private sector. For instance, according to Recovery.gov data, so far a little over 13,000 contracts went to independent contractors and over 116,000 grants went to public agencies. Also, reports have shown that the stimulus funds have been used to pay for employees whose jobs were never in danger (see California for instance).

Finally, the data on Recovery.gov reveals that many private-sector jobs were created at very high cost to taxpayers. For instance, $437,675,000 was awarded to CH2M WG IDAHO, LLC, in Washington to create 496 jobs. That’s $882,409 per job. That’s not as bad as the $257,613,800 awarded to the Brookhaven Science Associates, LLC, in New York to create 25 jobs. That’s over $10.3 million per job.

It’s worth noting that due to over-reporting issues, the White House’s claim of 640,329 jobs created or saved is likely inaccurate. USA Today noted that “the federal government sent Bob Bray $26,174 in stimulus aid to fix a fence and replace the roofs on public apartments in Blooming Grove, Texas, a town of fewer than 900 people outside Dallas. He hired five roofers and an inspector to do the job. But the number of jobs he reported to the government looked very different—450 jobs.”

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.

FURTHER READING: DeRugy has pored over government spending for THE AMERICAN. She details how unemployment has increased in tandem with stimulus funds in “So How Is the Stimulus Working Out?” and how Obama has been “Making Bush Look Like a Piker.” She offers “A Peek Inside the Deficit” and asks “Is This What Deregulation Looks Like?”

 

Image by Darren Wamboldt/Bergman Group.

 

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