Last week BLS reported the unemployment rate rose to 9.5 percent in June–much higher than the Obama administration’s prediction at the time of passage of the stimulus plan.  I thought the purpose of the nearly $800 billion stimulus package was to prevent such unemployment numbers?  The website Instapundit links to a chart released by the Obama administration to justify the stimulus package.  Even more puzzling is Nobel prize winning economist Paul Krugman used this same chart to justify the stimulus package.  When I first saw this posting I thought Mr. Krugman wrote it a couple of months ago.  I was astounded to see the day was July 5–two days after the BLS released the June unemployment figures.  A better chart is here. 

When I looked at the chart I found it interesting that in either scenario–stimulus or no stimulus–unemployment would be the same, roughly 5 percent in the first quarter of 2014.  If that is the case why was the stimulus necessary?  The administration and its backers like Mr. Krugman argued with the stimulus, the unemployment rate would peak at 8 percent, without it the rate would creast at 9.6 percent.  With total employment in the U.S. around 154 million people, it would mean at the height of the recession roughly 2.5 million more people would have jobs (154 million times 1.6 percent). 

When economists make such predictions of the future economic climate, they make a series of assumptions.  For predictions of future unemployment rates, one  assumption I would think they make is the size of the federal debt and the amount of interest paid on this debt.  For both scenarios to come out with the same unemployment rate the assumption on the debt and interest payments should be the same.

That would mean the $800 billion would be repaid by 2014.  Yet that does not sound like a realistic assumption.  To pay it back that amount it means the federal government would need to come up with roughly $200-210 billion a year in additional revenue or spending cuts ($800 divided by 4, plus some interest).  The Obama administration argued with more Americans employed it would generate higher revenues from income taxes.  

Is that really the case?  Assume for a moment there are 2.5 million additional workers (from above), each making $100,000.  That would mean a total of $250 billion in income.  If each is taxed at 25 percent, the government would get an additional $62.5 billion in tax revenue.  You could argue the federal government would save money on lower transfer payments to those who would otherwise be unemployed without the stimulus package–for argument’s sake make it $62.5 billion.  One problem is in every year, the difference between the unemployment rates in the two scenarios diminishes.  As a result, you might expect an additional $125 billion in revenue (which is still over $75 billion less than needed) in the first year, but the additional revenue expected gets smaller in subsequent years.  So the federal government would need to find the revenue from another source–either higher taxes or less spending.

Some economists would say additonal revenue might come from the multiplier affect.  That is, if these workers make $250 billion, they will spend much of it, which generates income for others who in turn pay taxes.  Such an argument is flawed because if these unemployed workers received govenment benefits, it would have the same multiplier affect, so the stimulus spending would not add any additional net revenue.  

The other assumption the Obama administration could make is borrowing $800 billion from the private sector doesn’t produce any negative affects on the economy and it can be paid off in later years.  If this is the case why not spend more and reduce the unemployment rate even further?   Obviously it does have a negative impact because if it didn’t, why are the unemployment rates the same under both scenerios?  If the government tries to pay back the stimulus spending in the next couple of year it will have to raise taxes, which would dampen employment growth.  If they don’t, the government will have to raise taxes or borrow additional money just to pay the interest on the $800 billion is additional debt, which would also dampen employment growth.  

The recent economic data has shown even the most optimistic predictions used by the Obama administration to justify the huge run-up in debt have proven false.   Hopefully members of Congress will ask some serious questions of President Obama’s economic team when they come up to Capitol Hill to request a second stimulus package.