Does Direct Government Stimulus Create Private Sector Jobs?

We may soon have a few more clues to the answer to this much debate question. Some of the government stimulus has been used by states to pay the salaries of new hires -- working for private firms. Yet, this funding won't last forever. When federal money runs out, will the jobs disappear with it?

Catherine Rampell from the New York Times reports:

The opportunity to simultaneously benefit struggling workers and small businesses has helped these job subsidies gain support from liberals and conservatives. Congress is now considering whether to extend the subsidy, which would expire in September, for an additional year. A House vote is expected on Thursday or Friday.

To be sure, this money is being spent on actual salaries for new jobs. According to the article the pay of 247,000 new workers depends on the subsidy. But that doesn't necessarily mean that the stimulus measure worked to create permanent jobs. Rampell continues:

The effectiveness of these programs will not be clear for many months, if ever. As the stimulus money dries up, employers will decide whether to keep the workers at their own cost or cast them back into the unemployment pool. Moreover, some economists fear that people hired with government subsidies may simply be displacing other workers, rather than adding to total employment, no matter how earnestly the programs are policed.

These economists' point of view is a common complaint about stimulus spending. These firms may have hired those workers without the government support, but figured they might as well collect free money from Uncle Sam, since he was handing it out. Indeed, the only thing we can really conclude about this program is if it was a failure, but we may probably never know for sure if it was a success. Think about the two possible scenarios:

Firms Lay Off These Employees

If firms do lay off these employees in hordes, then we'll know that the jobs were, in fact, temporary. If that's the case, then the spending was sort of effective, but sort of wasn't. On one hand, the spending really did create jobs. On the other hand, those jobs weren't permanent.

So some may argue that the program didn't exist long enough for the economy to catch up with the stimulus effort to where the businesses could sustain that additional hiring thanks to more demand for their products and services. But really, it's doesn't seem very convincing to say that the program could have been effective if the jobs don't last, because it's pretty impossible to know when demand is sufficient to sustain the jobs.

Firms Keep the Employees

If these businesses don't lay off these workers, however, then we won't really know anything. One possibility is the worry from above: the firms would have hired these workers anyway at exactly the same moment. The government effort then may have merely padded profits.

Another possibility under this scenario is that the program helped in terms of timing. For example, if a firm that collected this subsidy had hired someone last November, it may not have done so otherwise until this May. But there's no way to empirically distinguish this possibility from the first. Simply asking a firm when they might have hired otherwise isn't a very reliable metric.

In a sense, this is sort of a win-win situation, politically, for Democrats who championed the stimulus. If the firms fire these workers, then they'll blame Republicans for not extending the program. If businesses keep these employees, then they can tout the program as a success. They'll say that the government successfully bridged the gap between when the stimulus was provided for hiring and when the firms would have brought on employees due to additional demand. In reality, however, it's not really possible to definitely prove this claim.