Federal Plan to Save Local Government Jobs Cost $800,000 Per Job Annually, Economic Paper Finds

Why was the program so wasteful? The answer is surprisingly simple.

We’re finding out more every day about the true cost of Covid-19 policies.

Economists Jeffrey Clemens, Philip G. Hoxie & Stan Veuger recently released a paper titled Was Pandemic Fiscal Relief Effective Fiscal Stimulus? Evidence from Aid to State and Local Governments.

The National Bureau of Economic Research (NBER) working paper examines whether Covid stimulus was effective at the stated goal of preserving jobs in state and local government.

The results will be surprising to many.

The authors find that federal aid to state and local governments to save jobs was incredibly ineffective.

In fact, this program was even more inefficient than the notoriously inefficient Paycheck Protection Program (PPP).

Jon Miltimore recently wrote for FEE on the Federal Reserve Bank of St. Louis’ harsh critique of the Paycheck Protection Program (PPP). One highlight of the Federal Reserve’s report is the cost for each job-year saved with the PPP was incredibly expensive.

But as Clemens and co-authors point out, “[t]he PPP, which has itself been criticized for having a modest job-preserving impacts per dollar spent, has been estimated to cost much less per job year saved” when compared to the stimulus to local government.

So the PPP, despite being very expensive per job-year saved, was much less expensive than the federal spending intended to preserve local and state government jobs. How much less?

The PPP was estimated to have cost somewhere from $169,000 to $258,000 per job each year. This program to save state and local government jobs cost in the range of $433,000 to $855,000 per job each year. This is as much as 5x more waste!

This is a staggering amount to spend on preserving jobs, which begs the question, why was the program so wasteful?

Why the Waste?

The average salary for a state government worker is less than $100,000 even in the highest paying states according to ZipRecruiter. For the same amount of money it cost to preserve a single job, government could have created 8 jobs with a $100,000 salary digging holes in the ground.

So how did the government spend more than $800,000 per job to save jobs which normally pay five figures?

To understand why, consider the other institutions which support most of the employment in our society: businesses.

Firms would never be willing to spend $800,000 to preserve a worker who is usually only paid $100,000. Why?

Well, a business engaging in an ineffective and wasteful policy like this would make a loss on each worker and go out of business.

When the cost of a worker exceeds the value of what they produce (as judged by customers), private companies will lose money by hiring the worker. This mechanism ensures businesses don’t pay owners of resources (in this case labor) more than society values them.

Defenders of government policy here could argue that government is trying to fulfill a different role than business. Perhaps it’s the job of government to ensure steady employment in troubling times.

The problem with this line of thinking is it assumes jobs in and of themselves are good. But, as many great economists have noted, this belief is wrong.

Consider an exchange economist Milton Friedman had as documented by the American Enterprise Institute:

While traveling by car during one of his many overseas travels, Professor Milton Friedman spotted scores of road builders moving earth with shovels instead of modern machinery. When he asked why powerful equipment wasn’t used instead of so many laborers, his host told him it was to keep employment high in the construction industry. If they used tractors or modern road building equipment, fewer people would have jobs was his host’s logic.

“Then instead of shovels, why don’t you give them spoons and create even more jobs?” Friedman inquired.

The point of the story is clear. It’s possible for jobs to be wasteful. And government is particularly prone to generating these wasteful jobs.

Economist Anne Bradley explains why:

Jobs created through market competition are much more likely than government jobs to foster entrepreneurial thinking, discoveries, and the products and services that make people’s lives better at increasingly lower costs. This is not because government jobs are filled with bad or lazy people, but because the government does not operate under the self-correction mechanism that profits and losses provide.

The complete failure of Covid economic policy becomes clearer as more programs like this are examined.

Without a mechanism like profit and loss to evaluate the value of alternative options, we are left with a policy which spends nearly a million dollars to preserve a single job with a salary less than one tenth of that.

We can only hope future government programs are scrutinized more carefully given the wasteful policies generated at every turn.