Federal Spending Creates Few Jobs, Less Value

by | May 10, 2004

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 […]

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

Ronald Utt, privatization czar during the Reagan administration, is now a senior research fellow at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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