New hires or new jobs?

by Russ Roberts on July 15, 2010

in State of Macro, Stimulus, Uncategorized

In this earlier post, I expressed doubt about the Keynesian mechanism of stimulating aggregate demand as a way to put people back to work. As President Obama tours Michigan, trying to claim that his economic policies are working, you can see the issues clearly. Despite a lot of money flowing into the area, unemployment remains high and employment is below the level of a year ago. How can that be? Doesn’t all that federal spending boost aggregate demand and put people back to work? Read these selections from a WSJ story on the President’s trip and I’ll comment at the bottom:

Holland, Mich., where Mr. Obama visits Thursday, has seen a big infusion of cash from the president’s economic stimulus plan: hundreds of millions of dollars for new automotive battery plants, tens of millions for schools, as well as millions more for housing, small businesses, university research and transportation.

Yet many in the region of 260,000 people, struggling with 12% unemployment, are skeptical the federal spending has made an impact.

On Thursday, Mr. Obama will attend a groundbreaking ceremony at Compact Power Inc., the last of nine new advanced battery factories under construction nationwide with $2.4 billion in stimulus money, and the second in the city of Holland, population 34,076.

Holland shows the promise of the stimulus—and the challenge the White House faces in claiming credit. The city and its surrounding areas have received $472 million in Recovery Act funds, much of which has helped create a green energy sector.

Jane Clark, president of the Holland Area Chamber of Commerce, said the money would create as many as 10,000 jobs over the next decade. But in May, the latest local statistics available, payrolls in the Holland-Grand Haven metropolitan area were down by 2,000 from the year before.

“You can find plenty of stats that won’t put us at the top of a list” of recovering communities, she said. “But these jobs are the future.”

That future may appear distant to many unemployed people in Michigan. Ms. DeWind’s 20-employee company, Dewind Wells and Dewatering Inc., recently demonstrated to the Department of Energy the groundwater-decontamination system it developed with stimulus dollars. But Ms. DeWind said she didn’t hire any new workers for the project.

Energtx Composites, a 55-year-old family-owned company, is using $3.5 million in stimulus money to diversify from yacht-making to windmills. David Slikkers, chairman of the firm, said the company would meet its vow to create as many as 160 jobs with the stimulus money. So far, though, he’s made just 20 new hires.

In coming weeks, workers will begin converting a long-shuttered, 287,000-square-foot General Motors-Delphi auto parts factory into a milk processing plant, said Alan G. Vanderberg, administrator of Ottawa County, where Holland is located.

The project is using cut-rate Recovery Zone Facility Bonds, financed through the stimulus, that helped leverage $31 million in private investment. A parts plant closed for a half-decade will soon employ 70 full-time workers, earning at least $19 an hour.

So the theme of these excerpts is that job creation at places receiving the money from the stimulus is slow in coming. (Most of the rest of the article is about worries over the debt the Federal government is running up to fund the stimulus.) But what about all that money washing around the area? Aren’t people spending it creating jobs in other parts of the economy, some it right there in town? But as I argued in that earlier post, spending doesn’t necessarily create jobs. It could just push up prices or wages.

Consider the jobs that are described in the article at the firms that receive the stimulus money. True, one firm that got stimulus money didn’t hire anyone. Same with the school. Maybe the money kept people from being laid off–jobs saved as the Administration likes to claim. Could be. But look at the jobs that were actually “created” or that are likely to be. For example:

Energtx Composites, a 55-year-old family-owned company, is using $3.5 million in stimulus money to diversify from yacht-making to windmills. David Slikkers, chairman of the firm, said the company would meet its vow to create as many as 160 jobs with the stimulus money. So far, though, he’s made just 20 new hires.

Twenty new hires. OK, it’s not a big number. But maybe it’s not even 20. Maybe those 20 new hires are actually zero new jobs. How can that be? The key question is who are those twenty people? Are they people who were unemployed? Or are they people who quit jobs they already had because they were good at building windmills or re-tooling machinery and answered the ad at Energtx? If it’s the latter, the stimulus money just bids up the wages of people with skills matching what the stimulus money is going toward. If a lot of the 12% of the unemployed are construction workers who are good at laying drywall for new houses, not very many of them are going to get helped by keeping teachers employed or re-tooling a yacht-making factory. Especially as long as there are lots of empty houses in the area.

I’m not saying Keynes (or Obama or Larry Summers) is wrong because all spending does is bid up prices and wages. I’m not trying to prove that the stimulus failed. I’m challenging the standard macro textbook story that says aggregate demand leads to output that leads to employment.

Arnold Kling offers a similar critique here. He calls it hydraulic macro–basically arguing that “aggregate demand” is not a very good simplification for what makes a real economy tick.

The textbook aggregate demand story ignores how people view the future– the animal spirits–the confidence employers, investors, and consumers have about the future. If employers are anxious about the future (partly because the government is running up debt and because the regulatory environment is highly uncertain and partly because we’ve had a run of bad times), then spending doesn’t obviously create jobs. And if there’s a sick sector in the economy such as housing and people are slow to leave the jobs where they have sector-specific skills such as home construction, employment is going to take a while to recover.


49 comments    Share Share    Print    Email

Previous post:

Next post: