Jobs, jobs, jobs, stimulus, Depression

It’s been noted that President Obama used the word “jobs” more times (29) than other word in last night’s State of the Union address.  Much of that was in connection with a jobs bill that he plans to introduce, and about which he mentioned a few reasonable-sounding specifics.  But indications are that he and his party will try to do this one on the cheap, rather than open themselves to the “big spenders” charge or the predictable cries of deficit scolds who think there’s nothing wrong with the economy that a good bloodletting won’t cure.

And, according to polls, last winter’s American Recovery and Reinvestment Act (a.k.a. the stimulus bill) is unpopular.  It was too small to make much of a dent in the massive unemployment crisis, and the continued high and rising unemployment has led many to conclude, by that famous fallacy post hoc ergo propter hoc and with the encouragement of countless politicians and talking heads, that the stimulus actually caused the rise in unemployment.  Brad DeLong has an excellent column on “America’s Employment Dilemma” right here.

Some on the right have likened the Obama stimulus bill and the still-high unemployment to the New Deal jobs programs and the Great Depression:  the argument is, if they didn’t end it, then they must have caused it.  (Which is kind of like blaming Doctors Without Borders for an earthquake.)  Others make the less extreme but still ridiculous argument that because unemployment is still high, the fiscal stimulus must not have created a single job.  (Which is hogwash — Prof. Menzie Chinn of Econbrowser shows that private studies by IHS/Global Insight, Macroeconomic Advisers, and Moody’s estimate that the stimulus has created 1.1 to 1.6 million jobs to date, and Chinn himself estimates that the number may be more like 2.9 million.  It’s wonkish stuff, but worth a look.)

Anyway, here’s an unpublished letter I wrote a few weeks ago to USA Today in response to a letter that made that bogus argument about how those New Deal programs that employed millions somehow didn’t employ anybody:


George Moss, in a letter opposing the current economic stimulus program, cites the supposedly wise words of Franklin D. Roosevelt’s Treasury Secretary Henry Morgenthau in 1939 to the effect that New Deal spending had failed to reduce any of the unemployment in the Great Depression (“History repeats,” letters, Jan. 6).  While it is true that unemployment remained high throughout the 1930s, Morgenthau’s claim that it did not fall at all was simply wrong.

The official unemployment rate was 25% in 1933, Roosevelt’s first year; in 1937, after four years of partial recovery and New Deal jobs programs that employed an average of three million people per year, the unemployment rate had fallen to 14%.  If one counts those emergency relief workers as employed, as per the current definitions of employed and unemployed, then the unemployment rate fell from 21% to 9%.  In 1939, when Morgenthau made his pronouncement, unemployment had risen again (to 17%, or 11% if relief workers are not counted among the unemployed) but was still notably lower than when Roosevelt took office.

As these unemployment figures were retrospectively estimated a few decades later, Morgenthau, unlike New Deal critics of today, can perhaps be excused for getting them wrong.  But Morgenthau and other balanced-budget zealots deserve much of the blame for the spike in unemployment after 1937.  Following Morgenthau’s advice that the budget be balanced, Roosevelt and Congress cut spending and raised taxes, which derailed the recovery and plunged the economy into a severe recession.

With unemployment currently at 10%, any sudden attempt to balance the budget would be just as ill-advised and premature as it was in 1937.  That basic lesson of Keynesian economics is also the lesson of New Deal spending.


Ranjit S. Dighe

UPDATE, 17 Feb. 2010:  David Leonhardt has an excellent column in today’s NYT about the stimulus’s success in creating jobs.  Bonehead Quote of the Day goes to new U.S. Senator Scott Brown (R-MA), quoted as saying the stimulus “did not create one new job.”

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5 Responses to “Jobs, jobs, jobs, stimulus, Depression”

  1. Fever Says:

    You’re completely missing the point on the jobs question. Of course stimulus spending will create jobs no matter how wasteful or appropriate that spending is. The problem is that every dollar spent needs to be paid back. So it’s ultimately a question of who is most likely to spend that money more efficiently the Government or the people? When you factor in costs of collecting taxes, interest paid on Government debt and poorly spent stimulus monies the answer to that question has got to be the people.

  2. Laurence Says:

    Henry Hazlitt once bemoaned what he called “the fetish of full employment”. He stated that full employment is easy, any authoritarian government can put everyone to work breaking rocks in The Gulag for starvation wages. The hard part is putting people to work at productive endeavors. For the government the challenge is to spend money more productively than the private sector from which they are taking the funds in the form of taxes and inflation. Unfortunately our government, like most, historically has been better at spending money inefficiently than investing it wisely. The temptation to pander to special interests and court votes is simply too great.

  3. Mark E. Says:

    The State of Maryland is forced to balance its budget. As it relies heavily on real estate taxes and other forms of recession-hammered sources of funding, it has been forced to lay off many employees, including some of my colleagues and close friends. Our FY 2011 deficit is projected to be close to $2 billion, so it won’t be getting any better soon. (Ironically, we had just raised the sales tax to 6% (from 5%) prior to this mess.)

    I don’t believe my argument above supports Ranjit’s argument in all but a very basic way, but I think it is an easily comprehended (if overly simplistic) illustration of the basics of cause and effect in terms of the relationship between government spending and employment. Unfortunately, if it keeps up, I’ll understand it all too well.

  4. Tom McManus Says:

    People quote Keynesian economics all the time, but the only quote the in flow of government funds to the economy. The other part of Keynes theories are that when times are good that the government should extract all of the stimulus and hoard for the future. This is where Keynesian economics breaks down.

    Once the flow of government funds flows into the economy, there is no political will to take it back. This is why the implementation of Keynesian economics fails each and every time. His theory is valid, accurate and should work. But when politicians put it to practice, they will not take away the largess that it created.

  5. Mark E. Says:

    I think the ancient Chinese proverb, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime”, applies here. However, perhaps the rule needs to be applied to our government first.

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