Even as National Economic Council Director Lawrence Summers says the stimulus is working he also warned that he expects unemployment to remain unacceptably high for years to come. Unfortunately, Summers is half right: unemployment will probably stay high, but because of – not in spite of – the stimulus bill.
The Obama administration claimed that the government spending in the nearly $800 billion stimulus bill would “create or save” millions of jobs. And in one limited sense it will. The enormous increases in government spending will directly employ many workers. But that does not mean the stimulus will increase overall employment in the economy. Just the opposite in fact.
Academic research shows that increased government spending and government jobs crowd-out private sector employment. The government does not create wealth, it only moves resources around in the economy. Even now, with the economy in a recession, the money spent on government jobs is money that cannot be used by business to expand their own operations. Businesses are still investing, but at a lower rate than the recession began. The money the government spends on “stimulus projects” cannot be used by these same businesses to expand. So while government employment grows – private sector jobs shrink. Overall the jobs created by government spending are offset by losses in the private sector – and then some. One study of the Swedish economy found that for each government job created 1.15 private sector workers lost theirs. Government spending does not “create or save” jobs.
Worse, higher government spending discourages private sector investment. A larger and more expansive government – and the taxes needed to fund it – reduce profitable business opportunities and deter investors from putting their money to work in the economy.
Unemployment has primarily risen because of the reduced private sector investment and job creation since the recession started. The stimulus bill – and the taxes that will eventually need to be raised to pay for it –discourage investment and entrepreneurial job creation. No wonder that research shows that reducing government spending helps the economy while raising taxes harms it. Unemployment will probably remain unacceptably high for years to come – in part because of the misnamed stimulus bill.