Job Creation and the Recovery Act: Getting the Full Picture

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Job Creation and the Recovery Act: Getting the Full Picture
Posted by Jared Bernstein on February 25, 2010 at 02:23 PM EST
Imagine you were trying to measure the size of an iceberg and you only considered the part above the water. You’d be missing most of the picture, right?

That’s much like what happened in this story on the cost of construction jobs created by the Act. The article considers only the tip of the iceberg, misses what’s going on underneath, and thus gives a huge over-estimate of the cost of creating these jobs.

Technically, what’s missing here is the multiplier analysis (Keynes would be aghast!). Think about what it takes to build a road: when a state awards a contract to a road building firm, that firm has to purchase cement and other materials, and those purchases create jobs for producers of raw materials and manufacturers. They may have to buy or lease heavy construction equipment, supporting upstream jobs at factories. Hiring an actual crew to build the road is often the last step.

Interestingly, the story notes that money for construction projects isn’t just spent on direct hires--it pays for equipment and supplies too. What’s missing is that buying that equipment and supplies also creates jobs. By leaving out all those indirect jobs, the analysis undercounts the number jobs created by the contract and comes up with a cost per job that is way too high.

That problem is compounded by looking at just three months worth of job creation. About 75 percent of the recipients that reported said that their projects are less than half complete – pointing to future hiring off of those same dollars yet to come as projects ramp up.

As President Obama has stressed, we need to do much more to help get America get back to work. But when we’re looking at what we’ve done so far, let’s make sure we’re seeing the full picture.

Jared Bernstein is Chief Economist to Vice President Biden, and Executive Director of the Middle Class Task Force