A Final Look at the Obama Stimulus and its Consequences

This is my final look at the Obama stimulus. Here I look at the CBO report on the costs of the stimulus bill (HR 1). I have not seen anywhere in the media a breakdown of the bill in terms of spending versus tax cuts. So I have taken the ratio of spending and appropriations versus revenue cuts as indicative what the split is: 73/27. In my calculations, I keep the stimulative multipliers of 1.4 for spending and .4 for tax cuts. I use $140,000 per new job and (a more realistic) 2/3 of $140,000 as the maintenance cost to keep a job in each succeeding year. I look at job production for the life of the stimulus.

These are the bare bones of the stimulus package. Total cost: $787 billion

2009 $185 billion
2010 $399 billion
2011 $134 billion

Spending/Appropriations-Outlays $575 billion 73%
Tax Cuts/Negative Revenues $212 billion 27%

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2009 $185 billion

Splits:

$185 billion X .73 = $135 billion
$185 billion X .27 = $50 billion

Stimulative effects:

$135 billion X 1.4 = $189 billion
$50 billion X .4 = $20 billion

Total stimulative effect:

$189 billion + $20 billion = $209 billion

Jobs ($140,000 per each new job):

$209 billion / $140,000 = 1.49 million jobs
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2010 $399 billion

Job maintenance from first year (2/3 of $140,000 per job):

1.49 million jobs X ($140,000 X 2/3) = $139.1 billion

Net Cost of Stimulus in 2010

$399 billion – $139.1 billion = $259.9 billion

Splits:

$259.9 billion X .73 = $190 billion
$259.9 billion X .27 = $70 billion

Stimulative effects:

$190 billion X 1.4 = $266 billion
$70 billion X .4 = $28 billion

Total stimulative effect:

$266 billion + $28 billion = $294 billion

Jobs:

$294 billion / $140,000 = 2.1 million jobs

Job creation first two years

1.49 million + 2.1 million = 3.59 million jobs

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2011 $134 billion

Job maintenance from first 2 years (2/3 of $140,000 per job):

3.59 million X ($140,000 X 2/3) = $335 billion

If my assumptions are reasonably correct, then the Obama stimulus package will create 3.59 million jobs. 1.49 million in the first year and 2.1 million in the second year. The maintenance cost for these jobs alone in 2011 would be $335 billion but only $134 billion is budgeted for that year. This means in 2011 there will be a rapid loss of jobs funded by the stimulus.

I have previously noted that the economy needs on the order of 120,000 new jobs a month just to accommodate increases in population. That is 1.44 million jobs a year or 4.32 million for the first year of the recession plus the two subsequent years of the stimulus. Through January 2008, the economy also lost 3.6 million jobs and job losses are likely to continue for at least the next 3-4 months. I conservatively estimated these at another 1.5 million. So if we take the jobs needed plus the jobs lost and which will be lost and arrive at a job deficit of 9.42 million. Subtracting from this the jobs created by the Obama stimulus, the net job deficit at the beginning of 2011 will be 5.83 million jobs. So the Obama stimulus creates only 38% of the jobs needed to fill the gap. This is insufficient.

I think the hope of Obama and his economic team is that the stimulus will do a little razzle-dazzle and that as it runs out Geithner will have succeeded in loosening up credit and the economy will start expanding again.

This appears overly optimistic to me. The Geithner plan would pump another $2 trillion into a corrupt and broken financial system that has already absorbed $3 trillion from Paulson and Bernanke with no noticeable positive effects. The odds are, in the absence of an effective bank nationalization, the Geithner plan will simply pour more money down the same rathole. As a result and unless something changes, we are looking at a weak stimulus and no fix for the banking industry, or as I have been saying:

A bad stimulus + No bank nationalization = Depression in 18 months

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