The Stimulus Was a Success …unless you wanted it to stimulate anything

The state of California is getting a cool $838,680,283 in ARRA cash—not to save, create, or fund any jobs but to maintain the unemployment program in a state Standard & Poor’s says still hasn’t got its budget house in order.

This fraction of the total stimulus demonstrates an essential truth about the $787 billion Recovery Act, one that the perpetrators of President Barack Obama’s economic policies have just begun to mention in guarded, gingerly terms: The ARRA, either by design or by evolution, ended up functioning as a budget stopgap for existing government programs, not as Keynesian stimulus.

From Recovery.gov:

The U.S. Department of Labor has certified for release $838,680,283 in unemployment insurance modernization incentive funds to the state of California. California qualified for its full share of the funds available under the American Recovery and Reinvestment Act by including in its law provisions that assist recent entrants to the workforce, part-time workers and workers who become unemployed because of compelling family reasons.

A helpful Labor Department spokesman explains that the modernization involved changing some unemployment regulations. These changes make it easier for recent arrivals who were collecting unemployment in other states to go on the dole in the Golden State. “For example,” this spokesman said, “if a married couple living in Connecticut moves to California because the wife has a great new job, under the old system, the husband would not have been able to collect unemployment insurance. Now he can. As Gov. [Jerry] Brown put it, about 26,000 new Californians would become eligible for unemployment.”

Other modernizations include allowing unemployment to be collected during maternity leave. The Labor Department says 27 states now operate under the modernized regulations. So if you’re not working, you might as well come out to California and not work in nice weather.

Though you can’t call it stimulative, you can say some other things about California’s unemployment windfall. Many studies, such as this one [pdf] from JPMorgan, have argued that enhancing unemployment benefits increases the unemployment rate in two ways: by subsidizing idleness, thus driving up the average duration of a person’s unemployment; and by discouraging people from dropping out of the labor force entirely.

The Federal Reserve Bank of San Francisco and the union-backed Political Economy Research Institute question the first part of that disincentive equation—the money-for-nothing part. But the second part—the false elevation in the rate of labor force participation—seems to be supported by Labor Department statistics that show the U.S. rate of labor participation dropped 4 percent over the last 10 years, but has been absolutely flat, at 64.2 percent, since Congress approved $57 billion in extended jobless benefits in December 2010.

The implications for California’s continuing viability are even less ambiguous. Being able to offload payment of unemployment insurance (UI) to the Federal government might give Sacramento the appearance of having gained a cost-free inbound migrant. (Using Brown’s estimate of 26,000, the DOL’s contribution amounts to $32,256.93 per person.) But the reality is that another non-working person has just moved into a state with an 11.7 percent unemployment rate and an accelerating departure rate of productive business.

In their May study, “The American Recovery and Reinvestment Act: Public Sector Jobs Saved, Private Sector Jobs Forestalled” [pdf], economists Timothy Conley (University of Western Ontario) and Bill Dupor (Ohio State University) try to provide the mechanism to explain a phenomenon seen throughout the country during the period of maximum ARRA stimulus: As unemployment continued to climb, public-sector jobs grew in number and salary. Here’s the brief explanation:

ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment.

Conley and Dupor use more equations than a simple-hearted soul should trust, and the necessary data are not all there. (“It is important to note that we do not have enough precision in our estimates to conclude that number of jobs lost/destroyed was (probably) greater than the number created/saved.”) But they detail the nitty gritty of ARRA handouts. Some ARRA funds were relatively fungible, allowing states to use them to boost general funds rather than engage in stimulus. But even when federal payments were legally committed to be spent in a certain way, this allowed states to reduce their own spending in this area. Texas, for example, reduced its spending on highway, bridge, and street construction from $3.38 billion in 2009 to $2.82 billion in 2010—the period when it was receiving $700 million in ARRA infrastructure stimulus.

In some cases funds came with a requirement that states match federal spending, but the number of states that responded to ARRA funding by diverting spending to other areas is striking. It also makes more sense than anything else we have learned about the stimulus. The states were in, and remain in, the most severe fiscal crisis of the postwar period, and stimulus funds helped cover some of the shortfall. Jared Bernstein, the failed former economic advisor to Vice President Joe Biden, hints at this achievement when he says, “That ain’t nothing” to describe the ARRA’s achievement.

Of course, it also ain’t what the voters were told to expect from the stimulus. And it turned out to be only a temporary solution, as state and local governments have again run out of other people’s money and are laying employees off anyway. But Bernstein’s right: By the strictest possible definition, the stimulus was not nothing.

It will take years to figure out where the entire $787 billion went, but the evidence that keeps coming in suggests it went to tide over broke state governments; backfill unfunded commitments to public employees; extend rent control and homeowner assistance; and support film schools in a moviemaking backwater called Hollywood. But more than any of those, it went to tide over broke state governments.

If they were smart, Paul Krugman-style Keynesians could use these revelations to say that the post-2008 economy is not the radiant refutation of Keynesian stimulus it appears to be, because the money was misspent. I would say this is a retread of the old pure-communism and true-Christian arguments. Misuse of funds is not a by-product of government spending. It’s built into the system.

Tim Cavanaugh is a senior editor at Reason magazine.