Menu
Home

Obama's Stimulus Package Will Increase Unemployment

President Obama and the Democrats’ “stimulus” package will increase the unemployment rate. The changes they propose will also make us poorer, with fewer, less productive jobs.

The most obvious explanation is the $36 billion in increased unemployment insurance benefits. Larger benefits at least for this year will encourage some people, who may be unhappy with their jobs, to be unemployed while they look for something better. Others will be a little more reluctant to take a new job when they are offered it. Unlike the rest of the “stimulus” package that is over two years, since the increased benefits are only planned for this year, the higher payments will increase unemployment this year and then start declining soon after the extension ends.

Yet, the “stimulus” package will do something else that will increase unemployment at least as much. Most of the new jobs will be for people who are currently employed. By moving money from places where it is currently being spent to places where the government wants it spent, you move the jobs also. But it takes time for people to move between jobs. That is called unemployment.

The jobs that the government “creates” may be in different industries and they may be in different places. You increase subsidies even more for alternative energy, and of course those companies will expand, but the subsidies also mean that less will be spent on less politically correct energy sources.

You might create jobs in California, but you will reduce the number of jobs in coal mines in Pennsylvania, West Virginia and Ohio, or oil fields in Oklahoma and Texas. Where will those people who lose their jobs go? They aren’t going to instantly pack up their cars and move to California. They may not even have the right sets of skills for the new government-created jobs. Wherever it is these displace workers end up, it will take some time, and during that time those workers will be unemployed.

Most likely the jobs in the alternative energy industry will hire many employees away from industries that have nothing to do with coal or oil. The movement of those workers, as well as the impacts that the changes have on related industries, will temporarily cause some increase in unemployment. Even if you know that you want to get a job in the alternative energy industry, which job do you accept? It takes time to find the job that fits your interests. You may quit your current job to have the time to search full time for the new one.

All those changes means more unemployment.

Even just the threats of the stimulus plan being passed cause companies to change investments today, and that creates more unemployment now. The stimulus plan is creating unemployment even before it goes into effect.

Of course, people see the jobs being created and they don’t see the jobs that disappear. They will probably thank the government for providing them jobs, even though the government is draining the businesses that they currently work for of the money that keeps them going.

Obama is also implementing a lot of new regulations, from the environment to unions. The stimulus bill has a buy American clause, which forces materials purchased using funds from the stimulus bill to be made in America -- possibly threatening a trade war. Again, some industries will be hurt and others helped by the new rules, but changes created by these regulations are no different than changes created by the government that redirect spending.

Add to it Obama’s unjustifiable repeated comments about the “unprecedented” economic “crisis” and the panic he engenders, which cause even more changes in people’s behavior. And you guessed it – still more unemployment.

These changes are extremely reminiscent of what happened during the Great Depression. Not only do you have government-created jobs, you had the infamous Smoot-Hawley tariffs to protect American agriculture. We had strengthened unions that got some workers higher wages at the expense of other workers’ jobs. Many economists have argued that all these different changes created and prolonged the unemployment disaster we faced during the 1930s.

The result? By 1939, the average number of hours worked by the average working-age person was still 21 percent below what it had been in 1929. The U.S. recovery during the Depression lagged behind other countries. Could it be that our government simply tried too hard to try to fix things and in the process created a lot of chaos?

There is still another problem with all these jobs created by government subsidies. What happens when the subsidies end? If those industries that were propped up by the subsidies aren’t what consumers want without the subsidies, those industries will shrink and we get to go through the unemployment cycle all over again. Of course, by that time those industries will have their new constituencies to lobby to extend the temporary stimulus.

All this moving jobs around makes us poorer. People are subsidized into temporarily producing want isn’t really valued. But what do you expect from a program where dozens of political types are making decisions on where to spend almost a trillion dollars after only a few weeks of thought?

One thing is clear. The government will spend money in different ways than people otherwise would have spent it. And that means change, and change means temporary unemployment. Unfortunately, just as the government regulations that caused the financial crisis to begin with had people turning to government for more regulation, the turmoil and unemployment created by the government stimulus will cause even more to turn to the government for help.


John Lott is the author of Freedomnomics and a senior research scientist at the University of Maryland.

Please join the discussion on this piece here.