Priceless Macro, Part Two
By David Henderson
On Saturday, January 12, the Obama Presidency-Elect (I can’t think of a less clunky term) sent out, “The Job Impact of the American Recovery and Reinvestment Plan,” by Christina Romer and Jared Bernstein. It would qualify for Arnold Harberger’s term “priceless.”
The big thing missing is any cost-benefit analysis, even a crude one, of the “Reinvestment” Plan. We have a fairly good idea of the short-run cost of the new spending–it’s the amount that the government spends times (one plus the incremental deadweight loss per dollar spent). This is probably an understatement of the cost because many of the expenditures, although touted as temporary, may well be permanent.
What is the benefit to weigh against these costs? Romer and Bernstein estimate the increase in jobs and their estimates could be right, or not. But what is the value of these jobs? They don’t say. There are two ways the jobs could create benefits. The first is by producing things that people value. Unfortunately, with the things produced being politically chosen, the presumption is that they are worth well below a dollar per dollar of spending. I think a generous estimate would be 50 cents of value per dollar of expenditure. How much value, really, would have been created by the famous “Bridge to Nowhere” that Governor Palin first touted and then disowned? The second way the jobs could create value is by giving producer surplus (rents) to the workers. The producer surplus here is the difference between their pay and their supply price, the minimum price for which they would be willing to do the jobs. Their supply price is at least equal to their value of leisure and, for workers who would otherwise be working elsewhere, is higher. I bet a generous estimate here is 30 cents of producer surplus per dollar of pay. So that’s 80 cents total of value per dollar of expenditure. Moreover, as noted above, the cost of a dollar of expenditure is higher than one dollar because of deadweight loss from taxes (now or in the future.)