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Study on the economic crisis: natural job creation in the private sector far exceeds the alleged impact of stimulus packages

Montreal, December 8, 2009 – A few days before federal Finance Minister Jim Flaherty’s pre-budget consultations begin, the Montreal Economic Institute (MEI) is publishing a research paper on the crisis that began in 2007. It shows in particular how the positive effects on employment that are attributed to stimulus packages based on government spending pale in comparison to natural job creation in the private sector. This observation should encourage the finance minister to hold firm on his intention to avoid new public spending commitments in his next budget.

The study, produced by MEI senior economist Marcel Boyer, emeritus professor of economics at the University of Montreal, analyzes in particular the U.S. labour market based on data from the Bureau of Labor Statistics. The author explains that, despite the many jobs lost during the recession, millions of jobs were also being created in the U.S. private sector during these difficult months. In fact, an average of more than seven million jobs were created each quarter in the four latest quarters for which data were available when the study was prepared (from the fourth quarter of 2007 to the third quarter of 2008).

“When you compare these data with the number of jobs created or saved by the U.S. government’s recovery plan (about 650,000 after two quarters, according to the White House), it is easy to see how insignificant this number is compared to gross job creation in the private sector,” Mr. Boyer said. “Moreover, observers say this assessment of the recovery plan’s effects is generous, because the rules for calculating jobs are rather nebulous and lean toward an overestimate of jobs supposedly created or saved.” The cost of the measures adopted in February 2009 by the U.S. Congress is estimated at $787 billion. Last week, the Obama administration held a “job summit” to find solutions aimed at fighting the 10% unemployment rate in the United States.

Furthermore, although more jobs are created than lost during growth periods, millions of jobs disappear nonetheless each quarter. In the 65 quarters from the third quarter of 1992 to the third quarter of 2008, each net job created actually resulted from 21 jobs being created and 20 being lost, leading to strong growth in the U.S. labour market. Meanwhile, during the same period, each net new establishment opened by U.S. private businesses resulted in fact from 19 openings and 18 closings. Economists call this process “creative destruction.”

“It is often forgotten that the job creation and job loss numbers we hear in the news are expressed on a net basis,” Mr. Boyer stated. “When the dynamics of jobs and establishments created and lost are assessed in gross terms, one sees the economic crisis in a whole different light. Despite major net job losses in recent quarters, the fact remains that the private sector in the U.S. economy has continued to create a very high gross number of jobs.”

Mr. Boyer noted that, in reaction to the recession, governments have inflated their deficits as they attempt to stimulate the economy. He says, however, that the supposed beneficial effects of these “stimulus package” policies tend to come too late and that the improvised nature of the sets of proposed measures they contain also risks generating significant waste and harmful incentives by leading companies to be more concerned with their political representatives than with their markets.

In times of recession as in times of growth, he concluded, a strategy of budget deficits, protectionism and widespread subsidies can only cause more harm than good. “Deficits will have to be financed and eventually repaid in some way or other. Moreover, they consume substantial real resources, channelling them into programs that often make financial sense only on paper. Governments should focus their efforts on rebuilding confidence among consumers and investors and developing conditions favourable to efficient market operation rather than intervening directly in the economy.”

Michel Kelly-Gagnon, MEI president and CEO, added that “eliminating chronic government deficits in the mid-1990s enabled Canada to improve its economic situation compared to other developed countries. Considering the questionable effects of stimulus packages and their hefty cost, the federal government should make a firm commitment not to expand them but rather to focus on a return to balanced budgets and on a general decrease of the tax burden. These are the most proven recipes for an economy to regain sustainable growth.”

The Research Paper published today, titled The economic crisis and its impact on employment, can be downloaded free of charge at www.iedm.org.

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The Montreal Economic Institute (MEI) is an independent, non-profit, non-partisan research and educational organization. Through studies and conferences, it informs public policy debates in Quebec and Canada by suggesting wealth-generating reforms based on market mechanisms.

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Information and interview requests: Jasmin Guénette, vice president, Montreal Economic Institute, Tel.: 514 273-0969 ext. 2225 / Cell: 514 592-4056 / E-mail: jguenette(@iedm.org)

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