Mercatus Study Shifts My Priors on Fiscal Stimulus

...considerably toward the pro category.

I should have read this more closely yesterday - I read Tyler Cowen on the Jones and Rothschild paper up to his punchline: "…hiring people from unemployment was more the exception than the rule in our interviews" and didn't read any farther, which was a big mistake. I figured this meant that hiring from unemployment was very rare, but actually 42.1 percent of new hires at ARRA receiving firms were previously unemployed. This is surprisingly high (so high that I'm personally curious if there was some selection bias or misreporting biasing it up). The other estimates of this figure that I'm familiar with are associated with job creation tax credits, which I'm writing about for a conference this fall. Bartik and Bishop (2009), two of the most knowledgeable guys out there on these tax credits, estimate using BED data from the Bureau of Labor Statistics and some elasticities reported in Hammermesh (1993) that they expect their tax credit proposal to have 17.7 percent of their newly created jobs filled with unemployed workers. Job creation tax credits are widely considered to be an extremely effective form of stimulus, so to have ARRA funding create 42.1 percent of jobs for the unemployed is truly impressive to the point of being a little unbelievable.

Of course, as many have pointed out by now, you increase employment of previously employed people with these ARRA funds by increasing demand for labor. If these workers are moving from non-ARRA funded employment to ARRA funded employment, presumably they quit, they were not fired (otherwise they more than likely would have been moving from unemployment) and the original firm still demands labor and will try to hire someone else. So we can still expect indirect job creation in addition to these impressive direct job creation figures.

Of course these sorts of studies still can't get at the unseen - the crowding out that may or may not occur from ARRA. But I don't personally need convincing that crowding out is not a problem now, so this Mercatus study seems to suggest a strong stimulus - at least relative to benchmarks we have about what to expect.

Also, I have to complain about one point by Tyler Cowen. He writes: "The paper also sets a new standard for disaggregated data on this macro question". No, it really doesn't. It's a great approach that they take, don't get me wrong. But people have been doing field work of recipients of these sorts of funds for a long time. The Urban Institute does this. Lot's of people do it. And of course - disaggregated analysis of aggregate phenomenon has very real liabilities, as I've discussed on the state-level studies of the stimulus.

Some other reactions to the paper:

- Kevin Drum was one of the first to point out that this is one of the most ringing endorsements of the stimulus we've had.

- Yglesias concurs.

- Steve Horwitz raises a non-sequitor about how labor isn't fungible. Of course it isn't fungible, but it is substitutable. I'm not sure exactly what Steve is so worried about here. He gives no indication of how substitutable he thinks labor is, but it seems like he thinks there's very little prospect of it. I don't know why. And he seems to act like nobody is aware that different workers aren't perfectly substitutable. Not sure what to make of this post.

- Cowen responds to Drum. His first point is about labor market polarization which is what I mentioned the other day that Autor talks a lot about. I think this whole idea of labor market polarization is not as robust or meaningful as people like to pretend it is.

UPDATE (UPDATE 2 below): In the comment section of his post, Steve Horwitz is getting very concerned with my comments about what I thought was a simple point that "fungible" traditionally means perfectly substitutable and that economists think of a range of rates of "substitutability" between factors of production. I'm at home today finishing up a paper on a much less substitutable factor of production: engineering labor. That low substitutability has important implications for the labor market that I spend a lot of time talking about. Other jobs have much higher levels of substitutability. I haven't done construction work in years, but (if there were demand for construction workers) I could probably get a construction job and be more productive at it than I would be at an engineering job (which I wouldn't be hired for anyway - precisely because I wouldn't be very produtive). But even when we think there is low substitutability, we usually think there is still some substitability. My father-in-law was trained as a chemical engineer but currently works as a nuclear engineer. I guess whatever he specifically works on is similar enough that he could get started and that - with some on-the-job experience - he could be productive at. There is often some non-zero rate of substitution for any given worker with any range of jobs. Steve just thinks it's pretty low. Anyway, the idea that this is controversial boggles my mind, and I wanted to repost a comment that I have on that comment section:

"Fungibility is the interchangability of some good. We do not think labor is fungible. We do think it can be substituted at some discount. Am I wrong? Is there any difference in Chait and Steve's understanding except that Steve thinks the discount is steeper (but presumably not total - so that even under Steve's construction of the situation there is bound to be some indirect job creation in addition to the direct job creation)?

To challenge Chait's point you have to think that the firms whose workers were poached by ARRA are unable to hire any new workers to replace the lost workers. If you don't think that you have to agree with Chait that there is some additional indirect job creation.

How much and whether it offsets the cost of ARRA is an empirical question (and a tough empirical question at that)."

UPDATE 2: As Mathieu Bedard points out to me, Chait has a really dumb title to his post. It is wrong. As I subsequently point out, Chait has a really good post, despite the dumb, wrong title. Challenging the point he makes in the post is wrong, and challenging the word choice of the title strikes me as largely pointless - although I suppose right.