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Recovery Act in Action, #3: Tracking the Ripples

Summary: 
Jared Bernstein explains the ripple effects of the Recovery Act.

Editor's Note: In case you missed them, read Part 1 and Part 2.

Throw a rock in a still pond and you will observe many ripples.

Throw a Recovery Act program in a stagnant economy and you will observe many jobs.

Therein lies the lesson from our latest entry of the Recovery Act in Action, thanks to some truly thorough journalism by Robert Gavin of the Boston Globe.

Gavin looked at the ripple effects, or—if you want to be boring—multipliers, from $77 million in Recovery Act contracts awarded to Reveal Imaging Technologies (RIT), a manufacturer of airport security equipment in Bedford, MA.

RIT reports that thanks to the Recovery Act-funded contracts from the Transportation Security Administration, they’ve added nearly 40 jobs over the past year and they’re still hiring.  They’ve expanded their plant capacity, more than doubling the size of their facility.

But what Gavin’s article shows is that beyond these direct hiring effects, there’s a lot more upstream and downstream job creation generated by this type of activity.  So far, RIT has subcontracted parts of its Recovery Act projects to 21 other companies in 12 states “that make components or provide services for its advanced scanning machines.”

For example, an RIT subcontract helped reduce planned layoffs at a firm that assembles conveyor systems.  Same with a machine tool shop, whose “metal cutting machines, silent several months ago, are humming again” thanks largely to another RIT subcontract.

I spoke to the owner of that machine shop, Jack McGrail.  He told me that most of 2009 was pretty dismal and that if things didn’t improve he was going to have to let some folks go.  Then, in November, the RIT order generated by the Recovery Act came in, and, as Jack said, “it saved me from laying two guys off and I was able to add one more.”

That’s one type of multiplier effect—the jobs created by firms providing inputs to the final product.  But there’s another type that’s also important: the activity caused when people earn more and go out and spend it.  Gavin picked up this kind of activity too by visiting Rebecca’s Café, a restaurant near RIT that reports a 15% increase in sales since RIT expanded its workforce.

The evidence around the RIT case supports something economists have known since Keynes taught it to us: the jobs you directly create through government spending at a time of recession are just the tip of the iceberg. 

Thanks to the Recovery Act, there are hundreds of thousands of teachers in classrooms and police on the beat, construction workers fixing roads, weatherizing and rehabbing buildings, engineers building out the smart grid and planning new high-speed rail lines, and much more.  But as with RIT, for each one of these jobs, there are many others helping to supply materials and services to these firms and workers.

We’ll be throwing a lot more stones in the water in coming months, and I’ll be sure to keep posted on both the splash and the ripples.

Jared Bernstein is Chief Economic Advisor to the Vice President