A Calculator, and Bananas

Story Highlights:

• The newly signed-into-law American Recovery and Reinvestment Act promises to save and create 3.5 million jobs—but this number rests on fuzzy mathematics.
• Historically, employment's peaks and troughs lag the economic cycle, which in turn lags the market.
• Given the stimulus package's size and scope, the government can monkey around all it wants initially, as long as that capital eventually makes its way to more efficient, private hands.

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A room full of monkeys on typewriters eventually produces masterful literary works—or so we're told (we're doubtful). Is the same true for a room full of monkeys with calculators? We're not sure exactly, but maybe, just maybe, the result is justification behind the American Recovery and Reinvestment Act's (or less formally, the $789 billion stimulus package) promise to create and "save" 3.5 million jobs.

What Nobel-prize winning econometrics was deployed to arrive at this scenario? Surely, an undertaking this noble—the creating and saving of millions of jobs—deserves some hardcore linear algebraic wizardry, no?

It's not hard to figure out where the 3.5 million number came from. The US economy shed about 3.6 million jobs since the recession's start, so 3.5 million created "or saved" jobs will mitigate job losses to almost pre-recession levels. But how do we know the price tag necessary to create and "save" those jobs?

Even after setting aside the impossible-to-measure "saved jobs" aspect, it's apparent the calculations behind the jobs creation number are wonky at best. Government economic advisers figured a $775 billion "prototypical" stimulus package translates to an additional 3,675,000 jobs based on multipliers and the rule of thumb a 1% increase in GDP equals 1 million jobs created. But no one can quite describe with certainty what this multiplier is and how anyone arrived at it.

But allow us to take a stab at detailing how the economic gurus seem to have came up with $790 billion creating and saving 3.5 million jobs:

Take the $14.3 trillion US GDP.

Divide by 142 million employed people.

You get $100,000 output per worker.

A $790 billion stimulus plan spent roughly over two years equals $395 billion per year.

Divide $395 billion by $100,000 per worker = 3.9 million jobs created in one year!

Round that down to 3.5 million, because it'll presumably take longer than two years for all that money to get spent!

No matter if this is their exact methodology—the point is all this is fuzzy math no matter which way you spin it. The real puzzler, though, is the administration's determined focus on unemployment as the metric signaling the stimulus is working. To us, it seems they're setting themselves up for failure. Unemployment will, in all likelihood, be one of the last economic numbers to improve. Unemployment is a lagging economic indicator. Historically, employment's peaks and troughs lag the economic cycle, which in turn lags the market. Said another way, the economy will recover before employment recovers, and the market will recover before the economy.

Don't expect the stimulus to be perfect. Rather than focus on its minute details or its political promises (i.e., 3.5 million jobs), it's more important to see the stimulus as a massive spending boost. Given the package's size and scope, the government can monkey around all it wants initially, as long as that capital eventually makes its way to more efficient, private hands and increases velocity.