According to Keynesian economists, government hiring stimulates the private sector during a recession because government employees go out and spend much of their paychecks in the private sector, and extra demand is exactly what the private sector needs during a recession. But this year’s experience with census hiring contradicts that view.
Keynesians acknowledge that, someday, the private sector will pay taxes to finance the salaries and benefits of government employees, but this cost is said to be offset by the additional demand for goods and services produced in the private sector, which have those government employees as their customers.
Obama administration economists used this logic in January 2009 when they persuaded Congress to pass the American Recovery and Reinvestment Act, assuming a “multiplier”: that every 10 people hired under the law would create an additional six jobs. This is why they thought the law would have pushed the unemployment rate down close to 7 percent by now.
Of course, the unemployment rate is still close 10 percent. This might show that the legislation failed to stimulate the economy, or that the economy was in worse shape than the Obama administration originally thought, or both.
The Obama administration now says that employment would have fallen seven million if it weren’t for the stimulus, rather than the drop of four million that actually occurred from early 2009 to early 2010.
I don’t blame the Obama administration for underestimating the depth of the recession. But so far it has no way to derive its seven million estimate except by assuming that it had been right all along about the potency of the stimulus.
The law was admittedly a reaction to the state of the economy, but the 2010 census is a result of Article I of the United States Constitution, and thus provides an opportunity to measure effects of government hiring that might not be confounded by contemporaneous economic events.
The solid blue line in the chart below displays total payroll employment, inclusive of census workers and other government employees. The red line is employment apart from special census employment (I estimate special census employment as the difference between total federal nonpostal employment from its relatively constant amount outside the months February-July 2010).
If there were no extraordinary employment events this spring aside from the census, and, as Keynesians contend, hiring special census workers created jobs apart from the census, then the red line should have spiked like the blue one. In fact, the spike in the red line, if any, is pretty subtle.
If every 10 people hired for the census created an additional six jobs, then the only way to explain what actually happened is to contend, as shown in the dashed-blue line, that May and June had extraordinary and negative employment events that were offsetting the private sector benefits of census hiring and thereby obscuring an otherwise obvious spike in the red line.
Perhaps the stimulus benefits of public employment are both large and too subtle to be easily seen in the aggregate employment data or the private sector’s appreciation of public employment programs has been frustrated yet again by extraordinary negative events that miraculously coincide with true stimulus. Or maybe the Keynesian multiplier has been exaggerated.