It’s been one of the most fiercely-fought debates of financial crisis, conducted mainly in the absence of evidence: Do government stimulus programs create jobs?The Coalition has derided Labor’s stimulus programs as “wasted money”. Labor says without the tens of billions it spent building school halls, insulating home roofs and sending cheques to taxpayers Australia’s unemployment rate would have skyrocketed.
Today the journal Economic Letters, publishes an attempt at an answer.
Economists Christine Neill and Andrew Leigh have been able to do what those before them have not: measure the effect of stimulus spending on individual regions by comparing those that received stimulus dollars with those that did not.
Christine Neill is an Australian at Wilfrid Laurier University in Canada. Andrew Leigh was until recently an economist at the Australian National University and is now a Labor MP. He completed the research while at the ANU but the long delays in the journal process mean it has only now been published.
The usual problem in such a study is finding a controls - regions as economically depressed as those that received government payments that had to make do on their own...
It can’t be done for Labor’s stimulus payments. They went to all Australians who fitted the financial criteria and to all regions throughout the country.
But Dr Leigh discovered this wasn’t the case for an earlier program run by the Coalition.
The so-called Roads to Recovery program begun in 2001 directed money for roads to some local councils and not to others.
Dr Leigh found “clear evidence” the money wasn’t evenly directed to regions that needed it. Electorates held by Liberal and National MPs got more funding than those held by Labor.
By using the poorly funded but economically-similar Labor electorates as controls he was able to work out what the big licks of money directed to National and Liberal electorates actually did.
His finding: a 10 per cent increase in stimulus spending in an electorate creases an extra 26 to 78 jobs. The cost per job amounts to $10,000 to $31,000 over a three year period.
“That’s not that expensive,” Dr Leigh told The Age. “At times when the economy is depressed such as during the global financial crisis you would expect the effect to be bigger.”
“As far as I know we are the first to use this method. It has gone through the peer-review process in an internationally recognised journal, so I think it can withstand criticism.”
Published in today's Age
Email from Christine Neill:
If you want to know whether in some particular instance government spending can reduce unemployment, you've got to worry about the fact that an increase in unemployment often causes government spending to increase (eg welfare spending, etc). So if you just look at correlations in the raw data, you will often find that higher government spending is associated with higher unemployment. In econometrics terms, there's an endogeneity problem. There are all sorts of techniques used to get around that problem in the macroeconometric literature (policy experiment case studies (wars studies), vector autoregressions, or various calibration-type techniques). All are somewhat contentious. A typical microeconometric approach is to find an instrumental variable - in this case, something that is correlated with a change in government spending, but that is not itself likely correlated with a change in unemployment. Here, we used politics. Previously, Andrew Leigh had found that electorates with (then government) National/Liberal reps got more spending in the Roads to Recovery program. We find that those electorates also had a bigger drop in unemployment than other electorates, suggesting that the higher spending in an electorate via Roads to Recovery led to lower unemployment in that electorate. While you can't extrapolate from this to overall fiscal policy effects (including because you wouldn't expect any crowding out via higher interest rates, which is a concern with national-level fiscal policies), it is interesting that in even a very small jurisdiction government funded local infrastructure spending seems to be sticky, and to increase local employment.
There are a couple of other recent papers that try to take the same basic econometric approach: Nakamura and Steinsson: "Fiscal Stimulus in a Monetary Union: Evidence from US Regions" (uses military buildups in particular regions); and perhaps more interestingly: Mafia and Public Spending: Evidence on the Fiscal Multiplier from a Quasi-Experiment (this one is somewhat closer in spirit to our paper). They both have fairly similar findings, of quite large effects of government spending at the local level.
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4 comments:
Your post is misleadingly partisan because you are smart enough to know better. Because of such malignant reporting – politics and society become further polarised. Liberal Supporters will spot the issue while Labour supporters will think Liberal politicians are stupid/liars – are you felling better for making things worse?
Govt spending will create jobs – who is disputing that? You could spend millions of dollars asking people to dig holes and fill them back up again. By this definition jobs have been created. However, this is not long term productivity enhancement (i.e. future wealth). If you are really trying to stimulate demand – just handout cheques which have a higher multiplier. Hence the criticism of stimulus program and other spending. Do you really think taking on debt to build extra school sheds or buying obsolete laptops from overseas manufacturers contributed to the long term economic growth and jobs? This, rather than – govt spending does not create jobs is the opposition’s viewpoint.
You are too generous to the proponents of stimulus spending.
You say:
"Govt spending will create jobs – who is disputing that?"
Many people dispute it, quite possibly including Leigh and Neill.
They provided supporting evidence for a narrower proposition - that government spending in a particular location creates jobs in that particular location.
It would be falling for the fallacy of composition to automatically broaden that finding to the entire economy - certainly to broaden it to the Australian economy over time.
There is a very good reason why the best economic models are unable to find economy-wide employment effects of particular measures- there usually aren't any; almost certainly aren't any over time.
Having said that, the stimulus programs were't about the longer term (or about getting value for money). They were about getting money out the door fast.
In that, they succeeded.
Well it’s your blog, but I think there is a fair bit of obfuscation. I have my own biases too but still this irked me as a bit too blatant.
Firstly, No one disputes that spending money (govt or otherwise) will create a job. I am sure not even Leigh. When you spend money (along with other consumers), you consume a service/product – creating a job somewhere. This is not in dispute.
The dispute has been on the effectiveness of govt spending (for e.g.the whole multiplier debate in the US). Don’t get me wrong – I am all for govt moderating a business cycle and stepping in, especially to prop up employment and stopping a negative feedback loop. I am pretty sure even the Liberals would have had a stimulus program. The First home owners grant, cheques for taxpayers, even the Building the Education Revolution Program were designed to do all that. The opposition to this program (fairly mainstream – Warren McKibbin) – that it was inefficiently spent, ill conceived, excessive, much of it wasted in government administration and may have not even been required. Also it may lead to distortions in the long term.
Also the majority of the programs did not the money fast enough - this can be verified if you look at the Budget papers. The majority of the $45 billion or so occurs after 2008-09(Statement 6 in Budget Papers if I remember correctly). This is simply a reality that it is actually hard to dole out a large amount quickly for any organisation.
When you headline a post – ‘Evidence: Stimulus spending creates jobs - Delightfully, it is evidence from a Coalition program’, the rational interpretation is that – Coalition does not believe stimulus spending creates jobs. Hence my original comment that this is very misleading.
That apart, as I said – we all pander to our own biases, the trick is to recognise that we ourselves do not become a victim of it.
Firstly, No one disputes that spending money (govt or otherwise) will create a job.
Joe Hockey disputes it:
"The Government said at the end of last year that with the $10bn cash splash, they would create – create – 75,000 jobs, you know what? No one can identify one job that has been created out of that 10bn dollars."
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