Photo Credit: The White House
In putting forth his jobs program, President Obama faced a difficult dilemma: propose a program that could gain Republican support or a more ambitious program that would actually get the economy back on a path of recovery and job creation. The administration's proposal seems to have split the difference with a program that is likely to be seen as too big and too broad to receive Republican support yet too timid and too unfocused to produce a sustained recovery with substantial job creation. Much like the previous stimulus programs before it, this package is too small, too short-term, too reliant on tax cuts and tax credits, and therefore not optimally designed to support economic growth and job creation.
While inadequate in these respects, the package does move in the right direction, and might be enough to muddle through for another year. The package contains $80 billion to modernize schools and to improve transportation and $10 billion to capitalize an infrastructure bank, an institution critical to the way the United States finances some of its most important infrastructure investments. It also does more to help the people who need help the most--the long-term unemployed--while extending and adding to the payroll tax cut for American workers.
1. At first glance, the $447 billion stimulus program seems ambitious. But that number is misleading because it must offset nearly $170 billion in stimulus that would otherwise expire at the end of the year--some $112 billion in employee payroll tax cuts, $50 billion in unemployment insurance, and $5 billion or more in full expensing of investment. In other words, there is at most $280 billion in new stimulus. Thus, the program is as much about avoiding an additional fiscal drag on the economy that would result from the expiration of the payroll tax cut and unemployment benefits as it is about new support for growth. Without the extension of the payroll tax cut and the unemployment benefits, the economy will experience a fiscal drag of more than 1 percent of GDP in 2012.
2. Similarly, aid-to-states to prevent teacher, police, and fire-fighter layoffs is more of a measure to put the brakes on job destruction than it is a measure to boost employment. States and local governments have already cut nearly 150,000 education-related jobs in 2011. Additional assistance to states may help avert future layoffs (the administration suggests 270,000) but it will not increase overall employment much, if any.
3. The administration's proposals for extending payroll tax relief to employers, much like their proposed tax credits for business investment and for creating jobs for the long-term unemployed, are likely to have a modest effect at best on business investment and new hiring. Businesses tend to make investment and hiring decisions on the basis of future demand not on the basis of tax benefits. Studies tend to suggest that many of the businesses that do take advantage of these tax breaks would have made these hires or investments in any case. With demand weakening at home and around the globe, it is not realistic to expect businesses to add many new employees or expand productive capacity.
4. The most promising part of the president's program is the proposed $90 billion in school modernization, construction spending, and infrastructure investment. Infrastructure is the best way to create jobs and boost economic growth because it has a large multiplier effect and because it helps crowd in private investment. But how effective this part of the program will turn out to be will depend on its design. It is possible that the money allocated for the modernization and repair of schools may simply result in a shift in spending at the state and local levels, as local governments simply offset the increased federal support by spending less of their own money.
5. The most encouraging part of the president's speech was the administration's endorsement of a national infrastructure bank and in particular the Kerry-Hutchison BUILD Act. With a relatively small initial public capital investment, an infrastructure bank would allow the federal government to leverage a much larger amount of private investment and put it to work on productivity-enhancing infrastructure projects. If anything, the administration should have committed itself to a bigger and longer term program of infrastructure investment. Infrastructure investment has a greater multiplier and job creation effect if it is part of a long-term program that would give companies confidence in future demand. Of course, it will be argued that there are few "shovel ready" projects that can create jobs quickly. But that misdiagnoses the challenge we face: the problem is not a short-term slowdown that requires a short-term stimulus but a more serious longer term drag created by ongoing household deleveraging and the still very real threat of debt deflation caused by the huge private sector debt overhang. At the current pace, it will take anywhere between five and ten years for households to repair their balance sheets and for the private sector to bring debt levels down to more manageable levels. Until then, private-sector debt deleveraging will be a drag on both consumption and private investment. As such, we need a multi-year economic recovery program that reflects this reality and that seeks to offset this weakness with public investment-led growth and job creation--and that means first and foremost a robust program of public infrastructure investment.