Why Is Unemployment Rising Faster In the U.S. Than Other Countries

Did all that stimulus money just lead to higher unemployment rates?

By John R. Lott, Jr.

The Obama administration claims that it was their passage of massive government spending that saved the United States from another Great Depression. Last week, Larry Summers, Obama's top economic adviser, claimed that because of the stimulus:

"We have walked a substantial distance back from the economic abyss and are on the path toward economic recovery. Most importantly, we have seen a substantial change in the trend of job loss."

And Vice President Biden declared at the end of September:

"In my wildest dreams, I never thought it [the stimulus] would work this well."

As President Obama and other Democrats have correctly pointed out many times, this has been a worldwide recession. But if Summers and Biden are right in their assessment of the stimulus measures, one would think that the U.S. economy should be recovering better the many other countries, countries not wise enough to follow Obama's lead of an extraordinary $787 billion increase in government spending. It is also particularly timely to evaluate the spending since Christina Romer, the chairwoman of President Obama's Council of Economic Advisers, told Congress today that the stimulus had already had most of its impact on the economy.

Take Canada. Their stimulus package was nowhere as extensive as ours. Their $22.7 billion in stimulus spending this year, and $17.2 billion next year, amounts to about 7.5 percent of their federal spending for their 2009 and 2010 budgets -- not much more than a third of the per-capita stimulus spending in the United States.

Has Canadian unemployment climbed higher than than ours because of their relative inaction? Hardly. Last September, unemployment in both Canada and the U.S. stood at 6.2 percent. By January, when President Obama took office, the U.S. unemployment rate was 7.6 percent; Canada's was at 7.2 percent. But since then U.S. unemployment has gone up much faster. In September, the U.S. unemployment rate had soared to 9.8 percent, while the Canadian rate had only increased to 8.4 percent.

But it is not just Canada where the unemployed are faring better. Other countries, too, decided against a massive stimulus plan. In March, with German Chancellor Angela Merkel nodding in agreement at his side, French President Nicolas Sarkozy declared: "the problem is not about spending more." Later that month, the president of the European Union, Prime Minister Mirek Topolanek of the Czech Republic, castigated the Obama administration's deficit spending and bank bailouts as "a road to hell." The Washington Post wrote that there was a “fundamental divide that persists between the United States and many European countries over the best way to respond to the global financial crisis.”

The unemployment rate in the European Union was higher than in the United States to begin with even before the Obama administration's spending. By January, the EU unemployment rate stood at 8.5 percent -- almost a whole percentage point higher than ours. So what has happened since the big U.S. stimulus spending spree was passed? We more than caught up with the EU's high unemployment rate. By August, the last month data is available for the EU, the U.S.'s unemployment rate slightly exceeded the EU's -- 9.7 versus 9.6 percent.

Germany has particularly been out front resisting the call for more public spending. Yet, from January through September, the German unemployment rate only rose slightly, from 7.9 to 8.2 percent.

Data on unemployment rates from 27 countries from Japan and South Korea to Brazil and other South American countries to Europe shows that from January to August display the same consistent pattern. Even in the EU it isn’t just a few countries that are driving the relatively small increase they have experienced. The U.S. had a larger increase in unemployment that 22 countries -- that is, 81 percent of the countries had a smaller increase in unemployment this year than the United States. Unemployment in some major countries such as Brazil and Russia has actually fallen since January (see Table here). Other countries, from France to Mexico to Australia to Switzerland, have seen unemployment increase by only about half the amount of the U.S. rate. Indeed, the average increase in unemployment for the 27 countries is slightly less than half the US increase.

Table 1 can be seen here.

As Canada illustrates, it isn’t just countries that had higher unemployment rates before we passed our stimulus plan who have had smaller increases in unemployment this year. About half the countries had lower unemployment rates than the U.S. in January and half higher rates, but both groups of countries have seen much smaller increases in unemployment than the United States.

For thirteen countries in the Organization for Economic Co-operation and Development it is possible to use estimates of the size of different countries stimulus programs and compare it to the change in unemployment rates. Countries with larger stimulus spending tended to have bigger increases in unemployment. Each one percentage point increase in a country’s GDP that is spent on a stimulus was associated with unemployment increasing by about a third of a percentage point. The impact isn’t statistically significant, but any increase in unemployment hardly comforts nations that are piling up huge debts.

Figure 1 can be seen here.

So why would more stimulus increase unemployment? Spending almost a trillion dollars on various stimulus projects means moving a lot of resources from areas where the private sector would have spent it to the public sector thus eliminating the jobs many people currently have.

Jennifer Psaki, a White House spokesperson, declined numerous requests to answer any questions from Foxnews.com regarding the findings shown here.

The unemployment data from other countries raises serious questions about the large government-spending program, especially since the U.S. program that was primarily sold as a good way to create or save millions of jobs. With the Obama administration and Congress already talking about possibly providing another $200 billion to extend these government-spending programs, these data raise real questions about the efficacy of this spending.

*John Lott is the author of Freedomnomics.