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A simple recalculation story about the stimulus
Let's say a real estate agent is laid off and, at some point, needs to start working elsewhere in the economy.
One scenario is that the former agent searches for twelve months and finds a job in the health care sector. The economy loses twelve months' worth of output from that individual. (These numbers are chosen for illustrative simplicity and they are not estimates of actual variables.)
A second scenario is that the former agent is reemployed immediately, improving the energy efficiency of school buildings, and he is paid by stimulus funds.
Two years later, that stimulus money ends. The former real estate agent then searches for twelve months and finds a job in the health care sector.
The net effect is to sub in two years of insulating work for two more years working in the medical sector, or wherever that individual ends up in the later years of his career.
Both scenarios involve the cost of twelve months unemployment and the associated foregone outputs.
If you measure the progress of the stimulus early on, it will appear to yield higher employment and gdp growth prospects. Those benefits are to some extent an illusion because you are not picking up the possibility that labor market search is postponed but not avoided.
A plausible intermediate scenario is that an economic downturn is a mix of real and weak AD factors. So, after the fiscal stimulus, and after the insulation work is over, the former real estate agent can reemploy himself in six months rather than twelve. By this point in time AD is higher (perhaps) and labor market adjustment is easier. Still, the short-run measure of stimulus benefits will be about twice as high as the actual net benefit, all long-run adjustments considered. It will look, in the short run, as if twelve months unemployment have been avoided when in fact the savings are a net of only six months unemployment avoided (toss in discount adjustments plus consider the costs of taxation and debt).
Many people argue that "we're not yet out of the water" or that we are seeing a "jobless recovery." I agree on both counts. I would stress that those arguments do not unambiguously favor the case for more stimulus. On one hand, troubled times may suggest that we can't let the economic recalculation happen all at once. On the other hand, if the labor market is still sluggish when the stimulus ends, we are just postponing search and unemployment, not much reducing it.
Posted by Tyler Cowen on October 9, 2009 at 04:59 AM in Economics | Permalink
Comments
Beyond improving the economy enough that it takes less time for a worker to find a new job, might it not also provide enough of a bridge to keep people at work until the situation improves as the private market takes over again? The example above in of a public worker employed in a WPA-type position. How about a worker at the cement plant that provides material for repairing the school who stays on because of this contract and then is able to continue in his job when housing picks up again?
On the other side of the coin, two years from now, our school inspector is going to face strong incentives to lobby to maintain her 'job' rather than spend 12 months retraining and searching. Multiply that by hundreds of thousands (millions?) and square for rapacious public sector unions desperate not to lose all of their new members, and you've got a perfect storm for an indefinite extension of this unsustainable spending.
Posted by: Sean at Oct 9, 2009 5:33:49 AM
Aren't you missing the dead weight loss caused by government creating the jobs insulating? You never mentioned the taxes, inflation or interest on debt. And, you are implicitly assuming that government employment is just as efficient as private employment (just, government can do it sooner and this may or may not help).
But government is creating something for which there may be no demand--if there was demand for it then some private entrepreneur could have bought up the equipment and labor very cheap during recessionary times, just as Warren Buffet was doing--and government works without a hard budget constraint. So, it could turn out not to be an efficient way to employ these workers, but government would be unaware of this. If it did not matter whether government or the private sector employed insulators, and determined the best jobs and investments, then the Soviet Union should have been a highly successful experiment. Aren't you making a lot of unwarranted assumptions here?
Rather than leading to a reduced search time of 6 months, or the same search time of one year, once inefficient government employment has crowded out private investment, and the taxpayer and consumer are stuck with debt and inflation, it may take a fair bit longer than 12 months to find new employment.
Posted by: liberty at Oct 9, 2009 7:46:40 AM
Does it complicate matters at all that six months of unemployment is not necessarily only "half as bad" as 12 months? On the macro level, maybe. But for individual families, the first few months might be OK as people get by on savings. Then you start putting stuff on a credit card. Then more stuff. Then you start slipping on your mortgage. They you get forcelose. Then Junior drops out of college, you sell your car, etc.
Later in this scenario, it will start to take years and years to recover from the accrued debt. You need to buy another car and start making payments, while the old one was paid for. Your new mortgage is at a higher rate because of your credit. Junior is in jail, etc.
So month one does not seem equal to month 12.
Posted by: Sam M at Oct 9, 2009 8:04:56 AM
Those benefits are to some extent an illusion because you are not picking up the possibility that labor market search is postponed but not avoided.
Yeah but consider the difference between "here's a two-year job that will help pay the bills but not forever" and "you're out of work!"
In the "temporary stopgap employment" scenario, it is reasonable to suppose that a fair number of people will begin to engage in job searching (and perhaps anticipatorily, worker retraining) during their employment. That should shorten the search considerably, in some cases to zero (with a hypothetical hard deadline ending the stopgap employment, the worker looks for a job that starts at that end date).
I mean, this is all hand-wavy because I don't have the statistics. But there's a colorable case to be made that the job search could be shortened, and not just due to AD effects.
Posted by: mk at Oct 9, 2009 8:07:56 AM
Keeping our individual employed and therefore spending his income in the short run clearly also prevents ripple effects that maintain other individuals in jobs. It was the threat of a widening cycle of layoffs that the stimulus was designed to prevent.
It's clear that the economy needs a different mix of jobs than the one that prevailed at the peak of the latest expansion. It's also clear (at least to me) that we will move to the new and better mix of jobs faster because the government took steps to prevent systemic collapse of the banking system and steps to bolster aggregate demand.
Let's not edge back toward Treasury Secretary Mellon's point of view on stimulus :)
Posted by: russ sheldon at Oct 9, 2009 8:23:06 AM
can't you keep searching while you have the stop-gap job for 2 years?
Posted by: nate at Oct 9, 2009 8:49:38 AM
Good post, Tyler. Reminds me of a point Sumner made on his blog, but yours is a much more concise and intuitive description.
Posted by: Ryan at Oct 9, 2009 8:51:02 AM
This is about the least fair thought experiment you could devise for talking about creating jobs. The point of creating jobs comes from the underlying assumption that at some point in the future, the U.S. economy will recover.
In your scenario, it has not recovered.
In any case, discounting will make it quite clear that 12 months of unemployment now is worse than 12 months of potential unemployment in the future.
Posted by: Mike S at Oct 9, 2009 8:54:55 AM
The scenario assumes that some real, underlying non-government economy never recovers., i.e., that once the stimulus ends, the economy reverts to the exact state it was in before the stimulus started.
OTOH, in the real world, the length of time unemployed is correlated with the unemployment rate.
Once the assumption is made explicit, the scenario looks a bit silly.
Posted by: SJ at Oct 9, 2009 9:02:49 AM
in the "toss in" category...the productivity/efficiency/capital or labor intensity of the sector within which the "real estate" agent moves into during the transition period should have important implications for the overall output in the economy. While the nominal GDP figures might look the same (first two scenarios) the implications for growth cannot possibly be the same (I guess I am motivated by the non-homogeneity Austrian argumentation here).
Posted by: Anthony R at Oct 9, 2009 9:08:00 AM
Oh, come on. When the person who was hired to insulate a building goes back on the market a year later, the economy has changed. And, probably his prospects for using his acquired skills (from both jobs) increases. You also make the assumption that the work under the stimulus program had no value (just digging a hole to fill it) whereas insulating a building has future savings effect. But, also, don't forget that the insulated building now operates at less costs, and that the insulation manufacturing, when the economy picks up, will not have to bear the costs of restarting its business (as it would have had to do if there had not been a stimulus) and can continue operating.
Now, let's try what Bush tried in 2008: give a tax cut to stimulate the economy. I took my $1500 and bought a real nice Korean LCD television. Why is it that no one discusses the impact of the Bush 2008 tax cut? I frankly think the comparision should be made between that tax cut and the current stimulus program, don't you think?
Posted by: Bill at Oct 9, 2009 9:12:25 AM
Sort of like a much more expensive and convoluted "cash for clunkers", eh?
Posted by: Rich Berger at Oct 9, 2009 9:18:37 AM
This story suggests that stimulus actually prevents recovery.
Posted by: Anonymous Coward at Oct 9, 2009 9:59:19 AM
There's also the issue of increased productivity from experience gained on the job. In the first scenario, after three years, the worker has two years experience in healthcare. In the second scenario, after three years, the worker has no experience in healthcare, and the two years experience he has in insulation goes to waste.
And keep in mind that the expertise advantage persists for a long time. Three years later, we'd have a worker with five years experience and commensurate salary in the first case and a worker with three years experience and commensurate salary in the second case.
Posted by: Andrew Berman at Oct 9, 2009 10:06:30 AM
OK, let's talk about the other stimulus program: supporting the lifestyles of the rich and famous.
The US just stepped in and saved the bacon of the bank bondholders and investment bankers. You would think that the wage rates of investment bankers would change, but of course it didn't because the government stepped in and saved the investment banks (Merrill, et al), banks holding mortgage backed securities, etc. In a dynamic economy where the risks were born by the institutions, that the workers at the institutions would adjust their earnings if their institution took a loss. Of course, the institutions did not take a loss that they would have taken had there not been government support. Consequently, the investment bankers wage rate did not decline.
That to me is a particularly galling stimulus program. Tyler bit.hes about some guy and his family earning less than $50k getting some short term support whiile the economy tanks (and by the way, unemployment insurance isn't free), whereas the guy who has his institution supported goes on his merry way. Oh, and maybe he's even luckier: someone writes a column that says the cause of his institutions failure wasn't caused by the investment banker's pay and incentitive structure and that the big bad government that was footing the bill shouldn't comment on pay practices of investment bankers because it would disturb the "market".
Stimulus comes in many forms: tax cuts (wow that really worked), support for institutions (wow that really worked for people making making millions of dollars in comp), and short run job training and interim employment measures for the lower middle class. Of the three, which do you think works and what is your preference. Or, you could say, none of the above, but then I would challenge you to take back the subsidies you already provided to the beneificiaries who didn't need it.
Posted by: Bill at Oct 9, 2009 10:21:16 AM
Andrew Berman says "There's also the issue of increased productivity from experience gained on the job....the two years experience he has in insulation goes to waste."
Actually, this could just as easily go the other way. When people are out of work for extended periods, their human capital skills erode (not to mention their mental, physical and emotional health). For many, perhaps most, workers, their productivity increases as a function of their total labor market experience, even if its not in exactly the same job as they're doing now.
Posted by: Erik Brynjolfsson at Oct 9, 2009 10:24:11 AM
I also think your hypothetical ignores the important point that the job finding rate is very procyclical so that the duration of unemployment should be less than 12 months in the second scenario. Of course, it depends on whether you think the post-2001 "jobless recovery" experience is the right reference point.
Posted by: David at Oct 9, 2009 10:47:53 AM
tyler is cooking up an anecdote about an individual situation and then using it to support a macro theory, with no intermediate story or theory as to how representative or important this story is.
OF COURSE there are situations in which stimulus is good for someone in the short run but disadvantages them in the long run. but this isn't just true for stimulus. it's true for anything, even for NOT changing, even for people holding on to their jobs (clearly there is SOMETHING i could do that would be better than what i'm doing now, if i would only spend 10 years working toward it).
i suppose the hidden assumption here is that in three or five years we will have stability in sectoral employment ie we won't see large scale movements in and out of sectors. the 'recalculation' story requires that this be true. why would this be true, even in a healthy economy?
also, and separately, this is probably the least autistic post imaginable, and tyler loses 300 autism cred points for it.
Posted by: babar at Oct 9, 2009 10:57:14 AM
Economists are not as dynamic of thinkers as you would assume.
Tyler's problem posits that a worker searches for one year, and gets a job, or he gets a stimulus job and searches one year after and gets the same job he would have gotten with the one year wait.
I posit that the world is more complex, and job search is more like a dynamic queing problem with backup inefficiency. Imagine an airport with a steady flow of takeoffs and landings. Suddenly, some of the planes don't take off. There is a backup. Planes can't land either because of the backup. Soon the dynamic system goes off the rails (sorry for switching metaphors) due to small initial pertubations that have big dynamic effects.
Job search and job switching have those dynamic system aspects to them. It is a STRONG assumption to make that you can move a person from period one to period two without disrupting the system and creating a bigger problem.
Not only that, but there are circumstances where waiting or search for the same job is inefficient and the government stimulus assisted job is part of the solution, and not part of the problem. So, for example, assume the worker is a construction worker, and our level of housing starts will not return to the levels of 2004-2007. It is inefficient to wait, but it is efficient to have on the job retraining with some government assistance. This also avoids the dynmaic queing problem (as the person is gainfully employed while being trained), and the problem of frustrated search which arises when, two years later, the construction worker has still not found a job and has exhausted unemployment benefits.
Posted by: Bill at Oct 9, 2009 11:13:23 AM
Isn't it possible, if we acknowledge that industry hiring practices are at least in part determined by subjective factors like investor optimism and consumer confidence, that by delaying the real estate agent's search for a new career, we reduce the time it takes for him to find a new job? For instance in your example, perhaps it takes him 12 months to find a job in the current market, but two years from now it takes only four months.
Posted by: Mike at Oct 9, 2009 11:14:43 AM
Don't you also have to factor in the notion that the person is less likely to be as productive in a 'stimulus' job as in the job he was trained for, and that providing a stimulus job makes it less likely that the person will go back to work in his area of expertise in a timely manner?
Assume I'm an unemployed financial expert. With no stimulus, times will be very hard, but I'll also be working my butt off to get another job in the financial sector where my training makes me valuable. But if I get a two-year stimulus job, I'm probably not going to try as hard to get back into my own field - and by the time two years are up, I may not be as employable, or employable at all, in my old field.
I'm sure this isn't a dominating factor, but it's just one more illustration that the real world effects are probably far more complicated than any simple models would be able to capture.
Posted by: Dan at Oct 9, 2009 11:25:38 AM
"A second scenario is that the former agent is reemployed immediately, improving the energy efficiency of school buildings, and he is paid by stimulus funds."
You're ignoring the point of targeted stimulus. We're not digging holes in the ground. I think the point of the stimulus is that when the stimulus funds run out, that school will have savings in their budget from more effecient insulation, and could therefore have more money to hire a new teacher. Maybe an ex-real estate agent?
Posted by: Matt Murtha at Oct 9, 2009 11:36:24 AM
Amen Bill. Sorry I didn't see your post before I wrote mine. Great minds think alike though, no?
Posted by: Matt Murtha at Oct 9, 2009 11:42:47 AM
obviously an instructive parable like this has a lot missing from it, so "how about this?" comments aren't terribly helpful ... so here's mine, echoing nate above: how would on-the-job search change the story?
Posted by: Luis Enrique at Oct 9, 2009 11:49:32 AM
Well, if stimulus work is paid by magic pixie dust, then there may be no downside considerations whatsoever to stimulus.
Consider something- there are businesses, even in downturns, that might have the ability to expand, but can't due to the fact that labor and other inputs are just expensive enough to make the proposition a losing one. As the downturn happens, labor and other inputs start dropping in price and these businesses start looking at the possibility of expanding their operations to take advantage of the newly available inputs, but then along comes the government and it bids up the prices of these inputs. Those businesses on the margin of expansion then can't expand their operations, and not only that, they have to help fund, along with every other actor in the economy, the consumption of these stimulus workers and their work.
Posted by: Yancey Ward at Oct 9, 2009 11:59:54 AM
