What Jobs? How Federal Stimulus Funds Failed To Deliver

by Cory Eucalitto | September 9, 2011

Jobs, jobs, and more jobs have dominated the national conversation this week. Just last night, President Obama released his long-awaited jobs plan of combined payroll tax cut extensions and infrastructure spending. But why is a jobs plan needed shortly after a stimulus package?

New studies by George Mason University's Mercatus Center, found here and here, with PDF links to the full reports, offer a less than stellar view of the impact of the $800 billion American Recovery and Reinvestment Act of 2009, commonly referred to as the "stimulus package," on job creation. The ARRA was designed to reinvigorate a sluggish labor market through tax incentives, contracts and loans in fields like education, transportation, and energy, and entitlement funding.  The Mercatus study examined over 1,300 anonymous and voluntary responses from managers and employees with organizations that received ARRA funding and found that the hoped for results did not materialize.The average organization that received funds equal to 10% of its revenue "reported retaining or hiring workers equal to 5 percent to 6 percent of its workforce," but as the study makes clear, "hiring isn't the same as net job creation." Only 42.1% of post-ARRA hired workers were actually unemployed prior to being hired. Comparatively, 47.3% of hired employees came directly from other jobs. Factor in the folks hired straight out of school or from outside the labor force, and ARRA funded hirings were evenly split between the unemployed and already working. 

Rather than creating new jobs, then, much of the stimulus simply created shifts in the labor market. When a worker leaves one job for another, there is no net positive effect on employment levels unless the person taking over the old position was unemployed.  

ARRA money failed to reach the organizations most capable of rapidly taking on new, qualified employees. The study found "no relationship between the ease of finding good workers and ARRA dollars" as they were allocated. This is an abject failure to live up to the conditions deemed necessary for successful stimulus by even the most ardent Keynesians. 

The Mercatus research also revealed that, by a 2:1 ratio, ARRA-funded firms indicated that they had already "been busy" before receiving the new funds. When divided into groups based on the amount of money received, it became clear that "firms who said things had been slow...were not more likely to be in the best-funded tiers." Instead of bringing opportunity to struggling businesses, dollars were spent merely giving people the chance to work a bit harder. This does little, if anything, to solve the joblessness problem supposedly being addressed. The conclusion reached by the research was that, for most firms, "ARRA was not a lifeline during a time of deep economic trouble: it was a new burden to carry."

That was not the only burden brought about by $800 in federal funds.  ARRA has also had a major impact on state budgets.

When the recession hit, state governments faced a perfect storm of falling revenues and high demand for programs like Medicaid and unemployment insurance. ARRA sent federal assistance to state governments to the tune $112 billion in FY 2010, according to the National Association of State Budget Officers. For FY 2012, federal aid has fallen to only $23 billion, and left many states with increased costs in the long run. According to the National Conference of State Legislatures, for example, 27 states have racked up $37 billion in federal unemployment insurance loans, on which significant interest payments are due this year.  In addition, state revenues, for example, remain more than $20 billion below pre-recession levels.

The states are still waiting for the invigoration through jobs and economic growth they had hoped would result from ARRA, and wondering about the impact of the President's recent proposal, should it come to  fruition.