The Department of Labor’s report this morning that unemployment rose to 9.5% nationally – a 26 year high – should come as a surprise to the Obama administration, who used a highly questionable formula to determine that the stimulus package would create more jobs. According to the original White House analysis, stimulus spending would increase GDP by 3.7% and a “1% increase in GDP corresponds to an increase in employment of approximately 1 million jobs.”
However, this formula relied on the White House assumption that government spending has a multiplier effect
of 1.57 in growing the overall economy, while tax cuts have a multiplier effect of only .99. This means for every unit of government spending, the economy grows by 1.57 times that amount, while for every unit of tax cuts the economy grows by only .99.
Really? Under this false logic, government spending always grows the economy, while tax cuts can actually be an economic drain. In fact, the government can theoretically just keep spending us into job growth and prosperity!
Not so. To the left, the blog Innocent Bystanders has conveniently highlighted just how well this White House multiplier has worked to stimulate GDP growth and thus create jobs. The graph shows the White House estimates for unemployment with and without the stimulus, while the red dots depict what actually occurred. Luckily, the White House has already come up with a terrific non-falsifiable theory called “jobs created or saved.” Under the assumption that the White House is never wrong, if the estimated 3.5 million jobs weren’t created, the stimulus must have saved them! (Note: the economy shed 467,000 jobs last month.)
It turns out that a dollar of government spending results in 70 cents of job-creating activity after two years. A dollar in tax cuts results in $1.30 to $3 of job-creating activity after two years. Put another way, a $1 cut in spending cuts job-creating activity by 70 cents. A $1 increase in taxes cuts job-creating activity by as much as $3.
The kicker: these numbers that show tax cuts have a high multiplier effect were derived from a study by Christina Romer
in 2007 – the same Christina Romer that serves as Obama’s Chair of the Council of Economic Advisers and who wrote the White House’s stimulus analysis above. I wonder who got to her first: John Maynard Keynes or President Obama?