May 5, 2004

May 5, 2004 | WebMemo on Federal Budget

Federal Spending Creates Few Jobs, Less Value

During the recent debate on legislation to reauthorize the federal highway system, many supporters of the program claimed that it would create 2 million jobs. But as decades of research demonstrate, such claims are questionable given the mixed findings of the many independent academic studies that have attempted to evaluate the relationship between federal spending programs and their actual job creating potential. In fact, of the many substantive investigations into the relationship between spending and jobs, only a U.S. Department of Transportation (DOT) study contends that highway spending has much of an impact on jobs. But as a review of that study reveals, many highway spending proponents exaggerate the ability of the DOT study to provide accurate predictions of the net new jobs created by additional highway spending.

 

An Inaccurate Study

The chief problem with the DOT study is that it relies on a type of model that is not an accurate description of how a market economy functions when millions of choices are made at any given point in time between hundreds of thousands of services and commodities, all in limited supply. Whereas in the real economy more of one thing means less of another as individuals and businesses substitute one product for another in response to changing prices, such offsets and substitutions are not considered in the DOT model.

 

As a consequence of these deficiencies and limitations, the DOT model has to be used with caution, and its limitations acknowledged. When these qualifications are considered, the job creating potential of any spending scheme will be found to be a small fraction of what such models contend. Although the DOT report made only passing reference to such drawbacks, other federal studies investigating similar federal spending proposals were quite explicit about such deficiencies.

 

Losses Elsewhere

An earlier Congressional Research Service (CRS) study using another version of the model used by DOT reported a much more cautious and qualified estimate of highway spending potential. Although the CRS finds that the first and second order effects of a billion dollars in new highway spending have a jobs impact similar to that projected by DOT's analysis, the CRS study makes clear in its summary and conclusion that these employment gains are likely to be offset by losses elsewhere in the economy under conditions typical of federal budgeting and economic reality. As the CRS study concludes:

 

To the extent that financing new highways by reducing expenditures on other programs or by deficit finance and its impact on private consumption and investment, the net impact on the economy of highway construction in terms of both output and employment could be nullified or even negative.

 

In contrast to the DOT and CRS studies that rely on similar models to predict likely employment impacts of highway spending, a General Accounting Office (GAO) study investigating the job creating impact of several federal spending programs actually went back and examined the historical record to determine what if any impact these programs had on employment. While the study dates from the early 1980s, the types of programs and issues examined are similar to those being debated today.

 

Although these spending programs were enacted during a deep recession in the early 1980s, the GAO researchers found that "implementation of the act was not effective and timely in relieving the high unemployment caused by the recession." Specifically, the GAO found that:

 

Funds were spent slowly and relatively few jobs were created when most needed in the economy. Also, from its review of projects and available data, GAO found that (1) unemployed persons received a relatively small proportion of the jobs provided, and (2) project officials' efforts to provide employment opportunities to the unemployed ranged from no effort being made to working closely with state employment agencies to locate unemployed persons.

 

Of relevance to the potential impact of highway spending, the study also notes that "funds for public works programs, such as those that build highways or houses, were spent much more slowly than funds for public services…" This is understandable given the long lead time between the decision to build a particular road and the time construction actually begins. For the typical federally funded road, environmental impact studies need to be completed, plans drawn up, land acquired, competitive bids sought, and contracts awarded before construction can finally begin. As a result of such delays, any employment effects related to additional highway spending would not occur for several years out, offering little opportunity to the unemployed.

 

At its peak job production, the 35,000 new jobs created by this program came at a taxpayer cost of $257,142 per job ($485,714 per job in inflation adjusted dollars). Under the circumstances, a far more cost effective effort would have been to hire the unemployed to dig holes in the morning, and fill them up in the afternoon.

 

Few Benefits

The Congressional Budget Office (CBO) also looked into the relationship between federal spending and job creation and other economic benefits, and concluded that the connection is relatively weak. In contrast to the previous studies reviewed, the CBO effort was a comprehensive review of a large number of academic studies conducted during the preceding ten years. Allowing for the fact that each of these studies approached the issue of economic impact of infrastructure spending from slightly different perspectives using a variety of estimation techniques, the overall opinion was that the results of these efforts were inconclusive in relating jobs to spending. In the end, the CBO concluded that:

 

The available information suggests three conclusions: some investments in public infrastructure can be justified by their benefits to the economy, but their supply is limited; some (perhaps substantial) portion of federal spending on infrastructure displaces state and local spending; and on balance, available studies do not support the claim that increases in federal infrastructure spending would increase economic growth.

 

Wasting Scarce Dollars

Although there are significant differences in each of these studies, with the exception of the DOT study claiming more than 47,000 new jobs for every billion dollars of highway spending, most studies find a jobs impact well below this number. What none of these studies addressed however, was the extent to which the goal of job creation should be a high priority for any federal program. Most federal programs were created to meet a particular need that Congress felt the government was obligated to address. Food stamps feed the poor, Medicare helps the elderly, and the department of Defense protects America from its enemies. To the extent that these goals are compromised by the elusive effort to create more jobs, scarce taxpayers dollars are wasted.

 

More importantly, policy-makers need to recognize that creating jobs is not the same thing as creating value. The expenditure of any sum of money on nearly anything will contribute to a job, but whether that job leads to the creation of products and services of broad public value is another question. Hurricanes, tornadoes, and forest fires create lots of jobs, but destroy value in the process, an outcome not materially different from much of today's federal spending on costly and underutilized light rail systems and other unneeded public infrastructure.

 

Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow at The Heritage Foundation.

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow