Continued employment woes highlight problems with Obama stimulus plan

July 16, 2009

RALEIGH — North Carolina’s latest unemployment numbers help expose problems associated with the federal government’s stimulus plan, according to a John Locke Foundation analyst with a Ph.D. in economics. Proposed state tax hikes of nearly $1 billion a year would make existing problems worse.

Click here to view and here to listen to Dr. Roy Cordato discussing North Carolina’s latest unemployment data.

The N.C. Employment Security Commission’s latest report lists the state’s unemployment rate at 11 percent for June, down one-tenth of a percentage point from May’s record-breaking rate of 11.1 percent. North Carolina ranks No. 8 in the country in unemployment. The May unemployment numbers featured the highest recorded rate since the state started keeping seasonally adjusted data, according to the ESC.

“The state’s continuing struggles with unprecedented unemployment offer more proof that the federal government has done nothing to stimulate the economy,” said economist Dr. Roy Cordato, JLF Vice President for Research and Resident Scholar. “In fact, increased government spending cannot stimulate the economy. Increased government spending is a drag on the economy.”

Pundits have missed that point, Cordato said. “We’ve heard plenty of excuses for the stimulus package’s failure: people are saving money instead of spending it; the money is going to Wall Street fat cats; most money hasn’t been spent yet; the stimulus plan was too small; there hasn’t been enough time for it to work,” he said. “All of these explanations miss the mark.”

“The stimulus package is a failure because it can’t succeed,” Cordato explained. “You can no more stimulate an economy by transferring resources from one group of people within the economy to others than you can receive a blood transfusion by taking blood from a vein in one arm and injecting it into a vein in the other arm. It makes no difference who the money goes to or whether people spend it or save it.”

Cordato points to the Obama administration’s earlier projections that its $787 billion stimulus spending plan would help curb unemployment. “In January, President Obama predicted that the national unemployment rate would reach 8.7 percent with no federal government action, while his administration’s stimulus package would help lower that rate to 7.9 percent,” Cordato said. “Now that the national unemployment rate has reached 9.4 percent — with the strong chance that it will continue to grow — we know the president was wrong.”

“What’s especially disturbing is that President Obama has said that the stimulus bill has worked as intended,” Cordato added. “If that’s true, the president must have been lying back in January about his intentions.”

Stimulus spending sucks money out of the private sector, where it’s needed for the investments that will help the economy emerge from its lingering slump, Cordato said.

“Unfortunately, state government leaders are faring no better than the Obama administration in recognizing this fact,” he said. “By agreeing that they want to raise state taxes by $990 million this year, House and Senate budget writers seem to ignore the evidence of an unemployment problem that’s been growing month after month in North Carolina for more than a year.”

“Higher taxes mean North Carolinians will have less money available to them to get the economy moving,” Cordato added. “This new state budget will help delay economic recovery rather than get the government out of the way of that recovery.”

Lawmakers are missing an opportunity to scale back the size of government and simplify the state’s tax code, Cordato said. “The economic downturn gave state leaders a good excuse to refocus on government’s core functions,” he said. “When interest groups and constituencies came around begging for more money for their particular pet programs — as they do in good times and bad — our officials could have said, ‘No, struggling taxpayers can’t afford it.’ Instead budget writers scrambled to find new, inventive ways to squeeze money out of the private sector to feed government growth.”

Seasonally adjusted employment decreased by more than 5,600 workers to a total of 4.05 million, according to the ESC. Unemployment also decreased by 4,700 workers, with more than 502,000 workers now listed as unemployed.

Unemployment has increased by more than 224,000 people in the past year. The state rate in June 2008 was 6.1 percent.

Those sobering numbers should convince taxpayers and lawmakers that so-called stimulus spending plans do not work, Cordato said. “It’s more than just a case of the Obama stimulus package not solving our economic problems,” he said. “The stimulus plan is the problem. Government cannot help the economy by taking more money out of taxpayers’ hands and funneling it to government projects.”

It’s a lesson that would benefit state budget negotiators, Cordato said. “History shows that raising taxes during an economic slump slows the recovery from that slump,” he said. “Unfortunately, history also shows that North Carolina lawmakers spend too much money during good economic times and respond to bad times by raising taxes. It looks as if the new state budget will continue that disturbing trend.”

“If North Carolina faces a continued struggle with double-digit unemployment rates and weak economic growth, taxpayers will know whom they can thank,” Cordato added. “Tax increases from state lawmakers will not pave the way to economic prosperity. They’ll only help government feed its addiction to too much spending.”

For more information, please contact Dr. Roy Cordato at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].