How Obama's Stimulus is Changing America

http://www.time.com/time/nation/article/0,8599,2013683-1,00.html

by dsspence • 16 years ago

2 2 16 years ago

lzw• 16 years ago

For government spending to create a job that pays around $60,000 a year, it costs about $100,000. Figuring $40,000 in overhead. These are estimates, but even if you change the figures, the math below will still work.

A business decides to hire an employee or not based on the businesses marginal productivity. Employees, for most businesses, are profitable as the business value of their labor exceeds the costs of their salary and overhead.

However, businesses must factor in risk as a cost, and in many instances, employees or expansions such as new stores or factories are not immediately profitable to businesses. Thus a business that is profitable per employee cannot simply double its workforce and thus double its income by hiring a bunch of new people. This "drag" on growth in employees is the marginal cost, or could be called the profits cost.

It will vary by industry, but it seems that a %10 factor for the marginal cost seems like a reasonable estimate. EG: for each $100,000 in operational profits we will hire another employee (With the rest going to capital investment, paying down loans, dividends to shareholders, etc.)

Thus, for the Obama administration to spend $100,000 to create one $60,000 a year job, they must take $100,000 out of the economy... and in the process remove that $10,000 from ten businesses, destroying 10 $60,000 jobs in the process.

This is why stimulus is never beneficial to the economy.

Fortunately, businesses are still generally profitable and the economy naturally wants to grow, so it will eventually recover from this damage. And when it does, people will give credit to the "stimulus" though by looking at the cost as well as the benefits, it is easy to see that it does more harm than good.

I used example figures here that will vary by industry, but you cant' deny that most employees are profitable, that businesses decide based on marginal value and growth factors, and thus the "cost" of a new employee is a fraction of their salary, and thus the creation of one job by the government will destroy a multiple of jobs in the private sector. The ratio may be 10-1 or it may be 5-1, but it is not "profitable" to the economy.

If it were, greece would be a roaring success story, because their government has done nothing but spend, spend spend.

dsspence• 16 years ago

The point you're making has been debated ad nauseum in the past so I won't attempt to refute it.

What I took from the article was that while the stimulus/recovery act was largely sold, and perceived rightfully or wrongfully, as a jobs bill, that likely won't be its legacy.

I think it is intellectually dishonest to compare the economy of Greece to that of the United States. In fact the article states that the stimulus funds aren't being directed like earmarks past, but acting in the same vein as venture capitalists. In the United States 80% of new jobs are created by way of small businesses. Yet that says nothing about how new industries are born (e.g. the DARPA funding that spawned the current internet economy).

How Obama's Stimulus is Changing America

Related Stories