Calculating the Cost of the Stimulus
The Secretary of the Treasury believes that the $43 billion additional spending accounted for by the stimulus added 200,000 additional jobs to the economy. My own estimate, given the relatively mild recession that we have had, is that no more than 30,000 to 40,000 jobs may have been saved.
Bearing in mind that in the United States there has been an absolute meltdown in the housing sector, the banking sector was in danger of almost total collapse, and that two of the three largest US automotive manufacturers went bankrupt, the US had a much larger load to bear.
Here in Australia the housing industry, far from collapsing has seen prices continue to rise, the banking industry, once the four major banks had their deposits guaranteed, immediately stabilised without a single cent of expenditure having been needed, and the car industry has remained solvent and without serious dislocation.
There never was the potential for a downturn in Australia that was found in the US yet even so, the unemployment rate rose from 3.9% to 5.8%. The Secretary of the Treasury has, however, argued that the stimulus has saved us 200,000 jobs. That is, that the unemployment rate without the stimulus would have risen to around 7.5% had no stimulus been applied.
My estimates show that the stimulus made hardly any positive impact on employment numbers and almost certainly caused some jobs that might have been created in the private sector never to occur at all. That is, because of the actions taken to create publicly funded jobs through the stimulus we lost other jobs in the private sector.
Such job losses occurred for a number of reasons. Firstly these losses were a result of the higher interest rates that the governments use of our national savings has led to. Interest rates stayed higher and will move upwards sooner because of the stimulus. Higher interest rates will have inhibited some business expansion.
Indeed, not only would higher interest rates have done so, input costs generally would have been higher as a result of the massive addition to public demand for resources that were needed to build the various stimulus projects.
Moreover, the higher interest rates will have kept the dollar higher than it otherwise would have been and caused exports to fall below levels that might otherwise have been reached.
Concerns about future tax increases would also have crept into the minds of some businesses. Where their costs will go once the bill comes due is already a matter of some business calculation and will become an even greater consideration for business. This, too, will have inhibited private sector activity.
And this is just as true for the effects on business as they contemplate future rates of interest as they consider the effects of the stimulus on future finance costs. It would be a very brave business indeed that would assume their future cost of funds will not be rising over the next few years.
The issue for jobs therefore is not how many public sector jobs were created by the additional levels of public spending, but the figure must be a net figure that also factors in how many private sector jobs were not created because of the effects of the stimulus package.
The Secretary of the Treasury seems to believe that 200,000 jobs were created by the stimulus. That is an extremely high number given that the unemployment rate has risen already by around two percentage points.
But assume that is the case. The cost per additional job created by the $43 billion stimulus package is over $200,000 per job. As it would be impossible to argue that the particular forms of expenditure that constitute the stimulus will actually make the Australian economy a single dollar better off the money spent has therefore been an almost pure welfare outlay.
Thus, even on the Secretary of the Treasury’s calculation, we have spent $200,000 per job created, itself an unconscionable level of waste.
But his calculation assumes no jobs have been destroyed by the stimulus, only jobs created. Since the likelihood is that even without the stimulus, once the banking system was stabilised the rot would have stopped, my estimate is that the unemployment rate might have reached 6.1% with an additional 30,000 unemployed.
And if we have outlaid $43 billion to save a net 30,000 jobs, the cost per job saved has been an astronomical $1.5 million per job. At $200,000 per job the price tag was already ridiculously high, but at $1.5 million per job there is no conceivable sense that can be made of such an expenditure.
And if to this figure is added in the private sector activity that did not occur because of the outlays on the stimulus, the cost to the economy was higher still, much higher. The application of even a primitive form of cost-benefit estimate aligned with some common sense would have saved this economy an immense amount of money, and would have allowed us to proceed much more rapidly towards recovery.
The stimulus has only delayed the recovery process and has left us with a level of debt that will take years to repay. So far as public policy goes, it does not come any less sensible than that.