Monday, November 2, 2009

Economic Modeling and "Saving" 650K Jobs

President Obama's claim that the stimulus has saved 650K jobs is a great example of the poverty of using static analysis in economic modeling. Most of the stimulus is said to have gone to save public sector jobs such as teachers and police with the idea that these would have been cut without it.

Suppose these jobs were cut. Suppose all 650K would have been laid off. A dynamic economic modeling approach where actual decisions would have been made by each person in the absence of the stimulus would likely reveal it is much lower. For example, suppose all 650K were laid off. How would they react? If all of them literally sat home on the couch and didn't look for a new job, the number would be right. What you would expect is that at least a portion of them would have looked for and found some other work. Further, the amount of taxpayer money (a portion of the $787B that has been spent) that was diverted back to temporarily save these jobs could have gone to economic producers such as businesses. Perhaps if government actions like this that choke off business investment weren't attempted maybe we'd have a sustainable recovery underway by now and new jobs would have been created for a portion of these 650K to fill. We'll never know. How many job openings have been postponed that would have arisen without massive government intervention policies? Unlike the government, I won't guess.

Anyway, a more thorough dynamic model would not view all public employees as merely passive couch potatoes who wouldn't look for a new job elsewhere. When the temporary stimulus runs out and public employees have to paid out of the normal flow of tax revenues, we will find out. We'll probably see these jobs on the chopping block in a year or two and we can test the thesis later. The only long-term way to keep government funded jobs going is for tax revenues to rise as taxable income rises as people go back to work. A stimulus like this only delays the inevitable day of reckoning. Enjoy the growth while it lasts.

No comments: