Just Saying It Doesn't Make it True

Ugh.

Grover Norquist's Americans for Tax Reform posted the following late last month: Post "Stimulus" Unemployment: A Historical Perspective.

It pulled some very interesting charts from the original Dallas Fed paper.  But, I do have issues with its basic premise.

1. Keeping in mind that the basic thesis is that the fiscal stimulus bill enacted in January 2009 is destroying jobs.  The observation that "it was October when the big-government spending spree really started," is pretty irrelevant.

2. Correlation does not imply causation.  Statistics 101.  The ATR doesn't bother to answer the question, "Why does increased fiscal spending destroy jobs."  They only bother to note that job losses are very high at the same time a large fiscal stimulus is taking place.  In addition, take a look at chart 1.  What I see is a very steep upslope in the unemployment rate starting roughly 2Q08.  Then in about the beginning of 3Q09, the rate of increase in unemployment seems to be slowing. Coinciding with the period when the biggest impact of the fiscal stimulus bill was expected to occur.  It's a small sample, but it seems to run counter to the ATR's basic premise. 
3. Economists do have ways of evaluating whether government spending is impacting hiring by private businesses. The first way is to look at interest rates. In a nutshell, if government borrowing is soaking up all the available demand for lending (i.e. bonds) in the market, then there should be a commensurate rise in interest rates since a borrower would need to offer a more attractive rate of return to get some of the cash. Here's a look at 10 and 20 year corporate bonds from 2006 to present. There's a slight increase year over year in the 20 year maturity, but the yield on the 10 year is certainly lower. Visit this site and you can see that 2 and 5 year yields fell as well.

The second way to evaluate whether government demand is crowding out private demand for employees is by looking at wage inflation. The chart below from the BLS is pretty straightforward. Businesses are paying less for employees.



The take home message from the ATR is, "No matter how they try to spin it, the Stimulus has not only failed, it has also made the economic downturn considerably worse." Unfortunately it's never really explained how fiscal stimulus destroys jobs, only an observation that unemployment is rising despite more government spending. Like I said earlier correlation does not imply causation. If it did, I'd be a rich man.