The Cost Of A Job

Posted: July 12, 2011 in analysis

Conservatives, in recent weeks, have been crowing over some statistics announced by the Council of Economic Advisers which show, they think, the economic stimulus package in a bad light.  An example from The Weekly Standard reads like

The council reports that, using “mainstream estimates of economic multipliers for the effects of fiscal stimulus” (which it describes as a “natural way to estimate the effects of” the legislation), the “stimulus” has added or saved just under 2.4 million jobs — whether private or public — at a cost (to date) of $666 billion. That’s a cost to taxpayers of $278,000 per job.

I won’t question the accuracy of the economics or math that led to this figure.  The question I am interested in looking at is, how efficient a system does this represent?  We instinctively believe that $278,000 is way too much to spend per new job, but is there actually a better way?

First, and most important, that $278,000 didn’t just disappear into the one job it created.  It was used to buy stuff, like new roads and bridges, updated computer equipment, more energy efficient major appliances, and so on.  In addition to people getting jobs, the various governments get to keep the stuff they bought with the money.  So, the claim in the next paragraph, that

In other words, the government could simply have cut a $100,000 check to everyone whose employment was allegedly made possible by the “stimulus,” and taxpayers would have come out $427 billion ahead.

isn’t really fair.  If the government had just handed out checks, we wouldn’t have any new stuff.

But lets forget the stuff for the moment.  The number we have is just sitting in a vaccuum; to decide if it is overly big or particularly small, we need something to compare it to.  It sounds like a lot of money, but maybe that’s just what it costs to create a job out of nothing.

Historical Precedents

In 2003, the President’s Council of Economic Advisers under George W. Bush published a similar report to the Obama one, but this one was about tax cuts, not stimulus spending, and was forward looking, not an analysis of the past.  Let’s consider the numbers from that report, as predicted by the President’s economists.  The total amount of tax cuts was $726 billion, and the projected job benefits were 1.4 million.  That’s $518,571 per job, according to the projections.  Accounting for inflation brings the total up to around $610,000 in today’s dollars,  well over twice as expensive per job as the stimulus was.

Now, I’m sure a tax-cut supporter would argue with me that it isn’t fair to take the tax benefits provided by a tax cut and count it 1:1 as lost revenue, and thus equivalent to additional expenditures.  The whole theory of the Laffer curve and supply-side economics is that under the right circumstances, decreasing tax rates can increase tax revenues, or at least decrease them much less dramatically than 1:1, because the companies have more incentive to be productive.  But, this is a secondary effect and analogous to the “we got extra stuff” argument.  The conservative argument about the stimulus is framed around the primary effects only, so we should only consider the primary effects of whatever we choose to compare it to.

One-Time Events

The remaining flaw in this comparison is that tax cuts are an ongoing change in revenues, and the stimulus was a discrete expenditure event.  I do not have a blanket solution for this, but I believe the numbers above are still relevant to consider.  Initially, I was looking for one-time corporate financial windfalls to compare the stimulus to.  I wanted to answer the question “Which creates jobs more efficiently?  Giving a company a lot of money to make/build you something, and hoping they hire more people to do it, or just giving a company a lot of money (possibly by taxing them a lot less) and hoping they hire more people in general?” but I was unable to find any solid employment data to use for the calculations.

I did find a very interesting economics paper, though, which you can read here.  It makes the startling claim that when a company receives a large corporate windfall, the best strategy, from the perspective of management, is to waste the money.  Keeping the money liquid makes the company a target for takeovers, and in general, investing in capital expenses isn’t practical, because if there was real demand in the market to support expansion, the company would have grown already.  So it’s possible that a one-time “tax holiday” style event would have even less of a benefit to the job market than the tax cuts did.

Ultimately, $278,000 sounds like a lot for a job.  But between the things the stimulus project built and bought, and the prices we have paid per job in other programs, it seems like a pretty good deal.   And attacking it as too large without any comparison for reference does not make a compelling argument.

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