Creating a Shovel-Ready Economy

Garett JonesBB&T Professor for the Study of Capitalism,

Mercatus Center

Associate Professor of Economics, George Mason University

The Next 45 Minutes

•What happened

•Lessons from the stimulus (Jones-Rothschild)

•What next?

Unemployment

And Employment

Recent History

• 2008:

- Lehman Default

- then TARP

- then stock market collapse.

Activism first, stock collapse second.

The reverse of the Great Depression.

• 2009: Spike in unemployment:

- Unemployment often peaks after growth returns.

• 2010-2011: Tepid recovery

Financial Crisis: Hard to Shake

• When banks fall apart, recoveries are weaker for years on

end.

-Not like typical recessions

-True around the world, across decades

• Why? Controversial, but maybe debt is linked to debt

-Ex: Your mortgage pays your bank, which pays insurance

policies

• Today’s weakness: Largely (mostly?) caused by 2008, not

by 2009, 2010, 2011.

Dollar Sales: 5% Below Trend

Why This Matters

• 5% fewer dollars to pay for:

- Mortgages, Leases, Salaries, Credit cards

- Traditional View of Keynesian & Monetarists:

• Don’t let total spending fall quickly

• Destroys good businesses along with the bad

- Collateral Damage to the Economy

• One Lesson: Get spending up to old trendline

- Traditional channel: Federal Reserve

- Key econoblogger: Scott Sumner, Bentley College

- Draws on work by Feldstein, McCallum, Woodford

Did ARRA Help? Much?

• ARRA: A mixture of temporary tax cuts & government

spending

• Recent work: Tax cuts work better (in short run) than we

used to think. A surprise to me.

- Romer & Romer (CEA Chair & author of top text)

- Blanchard (IMF chief economist, MIT) & Perotti

- Harald Uhlig (U of Chicago)

Government spending: Maybe worse than we thought.

Overall Effect of ARRA?

• “On the basis of its continuing review of relevant

research, CBO has decreased the lower end of

its range of estimated indirect multiplier effects

from 1.0 to 0.5….”

-CBO, 11/2011

• Meaning: $1 of ARRA may have shrunk private

spending by $0.50.

• Possible: Government grows, private spending

shrinks.

The Caveat Page

• The high end is still high, according to CBO: 2.5!

- If 2.5: Government spending grows private spending

- In short-run only: In the long run it shrinks private

spending

-Keynes’s hope: A man who loved the private sector

• Multiplier might be higher in a weak recovery

- Probably higher in “recession,” not enough weak

recoveries to estimate.

• Stimulus after financial crisis? A fog, no good info.

What’s the Normal Story for Stimulus?

Should be “targeted, timely, and temporary.”

--Larry Summers

Focus here: Targeted at weak sectors of the labor

market.

- Better chance of hiring the unemployed

- Don’t hire in “bottleneck” sectors if possible

(DeLong, Clinton economist)

Was ARRA Shovel-Ready?

• Facts from Jones/Rothschild stimulus studies:

-46% of stimulus workers were “poached” from

other jobs.

This was job shifting, not job creating

• Poaching more common for the highly-educated

Best person for the job probably has one

• Poached workers: Overwhelming got wage hikes

Sign of Delong-style “bottlenecks”

What Mercatus Did, 2010-2011

• Stage 1: Interviews with dozens of stimulus-

funded organizations

- Private & Public sector

- Food bank, Construction & Engineering Firms,

Community Development Agencies, etc.

- 5 regions around the US

• Stage 2: Mail-in surveys from hundreds of

stimulus-funded organizations and workers

Result: Jones/Rothschild 2011a,b

• Coauthor: Dan Rothschild

• Mercatus, now of AEI

• Media highlights

- WSJ op-ed, 9/8/11

- C-SPAN, Jones, 10/1/11

Who Gets Poached?

• The educated

- People with graduate degrees: 63% poached

- People with high school degrees: 38% poached

• Lessons:

- Spending on doctors Less short-run stimulus

- Probably applies to skilled low-education workers

Craft professions: Pipefitters, lab techs, electricians

Didn’t the Poached Get Rehired?

• A theory, not a fact

- Only so many anesthesiologists around

• Signs point to Delongian “bottlenecks”:

Government hiring in hard-to-hire sectors

- More poaching among the educated

- Big wage increases among the poached

- ½ of organizations said hiring no easier or harder than

pre-recession

- Obligatory Solyndra reference

What Interviewees Told Us

• The Federal Government told them to hurry

- Result: Some firms said quality suffered

“The least useful thing…a crane and a forklift.”

“Tiny Tiles”

- Not as bad as digging and refilling ditches…

- This showed up in in-person interviews

But not in mail-in surveys.

• ARRA $: More red tape than usual

- Good intentions driving away some firms

• Lesson: Ramping up is hard to do

The Expertise Economy: Hard to Stimulate

• High wage jobs:

Paid for dexterity and judgment calls.

Often ultra-specialized.

Helps explain news stories and stats:

Hiring bottlenecks for “skilled” workers

When you hear “skilled,” think “specialized.”

• Low wage jobs:

Routine decisions, routine movements:

Competing with machines and with workers in less-

developed countries.

What Next?

• Congress may have little power on demand side, but can

improve supply-side

• Help workers & firms create relationships with each other

- Ex1: 99 weeks of UI to 52: likely creates > 100K jobs,

maybe many more.

- Ex2: Defer ACA penalties for non-insuring firms

• No reason to subsidize history majors (like me)

- We’re not developing expertise

• More experts probably create more work for non-experts

- Create more engineers, scientists—or just let them in.

- They’ll need some team members for routine labor—until

the machines are cheap enough.