Stimulus Watch: Follow along as Obama counts jobs
WASHINGTON (AP) – Few things in President Barack Obama’s economic stimulus plan have engendered as much skepticism or criticism as his oft-repeated promise to create or save 3.5 million jobs by the end of next year.
Republicans in Congress have labeled it fuzzy math. Former Republican House Speaker New Gingrich called it a “meaningless metric.” And Tony Fratto, a former spokesman for President George W. Bush, said it was a political trick unrivaled in his 20 years in Washington.
The fight over Obama’s promise has thrust a mundane economic formula responsible for the jobs estimate into Washington’s political spin machine. The formula is being misused by the president, whose advisers acknowledge it was never intended as a way to count jobs. And it’s being mischaracterized by Republicans, who previously have used such formulas to promote their own stimulus plans.
There’s no black magic at the heart of the formula, just two economic assumptions.
The first is that every dollar the government spends ripples through the economy, causing more than $1 worth of effect, such as: The government builds a highway. Road contractors have more money. They pay for food, rent and entertainment. Grocers, landlords and movie theaters benefit. Now they have more money. And so on.
The White House estimated that $1 in stimulus spending would have about $1.50 in effect on the economy, and that $1 in stimulus tax cuts would have about a 99-cent effect. (Economists predicted workers wouldn’t immediately spend their entire tax cut.)
The second assumption is that the U.S. work force expands by about 1 million jobs with every 1 percent increase in the overall economy. If Washington spends enough to send a 1 percent ripple through the economy, the formula says, there will be 1 million more jobs.
Hence the politically savvy term “created or saved.”
There are dips and turns in the formula. The $1.50 and 99 cent numbers vary, for instance, depending on how the money gets spent and how quickly it’s spent. But the formula is essentially stimulus money times a multiplier, divided by gross domestic product. Come up with 3.5 percent, create 3.5 million jobs.
“This was the right model for February,” said economist Christina Romer, the Council of Economic Advisers chairwoman who helped come up with the estimate. “We needed to know: ‘How big does this need to be? What’s the best way to do it?”‘
Conservative economists have argued that the multipliers are flawed. Obama’s advisers conceded up front that it was just an estimate. Cutting $288 billion in taxes might create more jobs. Spending $499 billion might create fewer.
Mushy? Definitely. Unprecedented? Hardly.
Bush used essentially the same formula in 2001 when pitching his own stimulus proposal.
“The bipartisan agreement reached this week can save 300,000 American jobs that might otherwise be lost,” Bush said in a radio address.
But the economic model was only intended to predict that jobs would be created, not count them. Think of the formula as a weather forecast. Obama is using it as a thermometer.
When White House officials say they’ve created 150,000 jobs they’re arriving at that figure based on how much has been spent, plugging that dollar amount into the formula, and announcing jobs. Under that strategy, as long as the administration spends all the stimulus money, it will hit its job-creation target, regardless of what actually happens in the overall economy.
That’s not how economists count jobs, and Romer says it’s not how she’s counting stimulus jobs. The formula was a prediction, she said, but counting requires actual numbers: unemployment figures, manufacturing and construction data, and county-by-county, state-by-state job reports.
“Once we’ve spent the money, we can’t just assume the model was right,” she said, adding, “The proof is going be whether or not the overall economy recovers.”
But with unemployment expected to keep rising in the near future, it’s not clear that Obama and Vice President Joe Biden plan to stop citing the formula’s calculations any time soon. Obama has promised to create 600,000 jobs by the end of the summer, a goal he is certain to hit as long as the government keeps spending money at a speedy clip.
If the economy improves, none of this may matter to voters. But if the economy continues to falter, Obama can expect more criticism about the formula and the 3.5 million-job promise it created.