Last night, President Obama presented the American people and a joint session of Congress with his plan for tackling unemployment and spurring economic growth. He repeatedly exhorted Congress to pass his package, The American Jobs Act, “right away.” Should they? Here’s a look at the main components of his plan and whether or not they’re likely to help create jobs…
(1) Infrastructure investments
The Obama administration seems to be going with the theory most economists offer to explain our current unemployment woes: a lack of demand is keeping companies from hiring and expanding. One solution that goes back to the Great Depression is for the government to boost demand by increasing its own spending. Obama proposes government-funded construction projects to modernize over 35,000 schools and build infrastructure like roads, railways, and airports. In addition to creating jobs in the short-term, these projects develop physical and educational infrastructure that can support economic growth in the future.
(2) Tax cuts for individuals
Another way to increase demand: put more money in the pockets of consumers, which Obama proposes to do by extending and deepening payroll tax cuts that are currently set to expire at the end of this year. Expert opinions on this policy are mixed: many feel the cuts may have some positive impact on unemployment, but aren’t the most direct, effective way to stimulate hiring. However, letting the cuts expire now that they are already in place could do significant damage.
(3) Hiring incentives for businesses
Creating incentives for businesses to hire now can encourage them to do so even if consumer demand doesn’t change. Obama’s plan offers several incentives, mostly in the form of targeted tax breaks:
- Cutting in half businesses’ payroll taxes (employers pay a portion of their employees’ Social Security and Medicare taxes, as well as taxes to the unemployment benefits fund). The cuts will apply to the first $5 million in payroll, targeting the benefit to small businesses.
- Eliminating payroll taxes altogether on new hires and wage increases.
- Providing a tax credit to businesses that hire veterans or the long-term unemployed (those who’ve been out of work over 6 months).
Cutting taxes businesses pay for existing workers doesn’t really incentivize hiring; many businesses are already sitting on lots of cash and their hesitance to hire isn’t due to a lack of funds but to a lack of demand. The tax cuts and credits that are tied to new hiring are much more likely to have an impact, though their effectiveness may be limited because they only represent a small share of the cost of bringing on a new employee.
(4) Protections for government jobs
I wrote yesterday about how ongoing layoffs by state and local governments facing tight budgets have offset what limited job growth the private sector has experienced. Half of government employees who’ve lost their jobs have been teachers and Obama proposes to provide aid to states to prevent further layoffs of teachers, as well as law enforcement and firefighters. State and local governments can’t borrow money the way the federal government can, so helping them ride out the rough economy without shedding too many jobs could keep public sector job losses from undermining private sector jobs gains.
(5) Extension of unemployment benefits
The President’s plan would extend unemployment benefits for another year. A record number of today’s unemployed have been out of work longer than 6 months, and this measure would provide immediate relief for these people and put money in their pockets which is likely to boost consumer spending. However, some economic research, including studies by Obama’s own chief economic advisor, shows that unemployment benefits increase the length of unemployment and reduce the incentive to search for a new job. To me it seems to be a “lesser of two evils” policy choice.
The big question is, as always, how will we pay for all of these tax cuts and spending increases? Obama says the plan will be “fully paid for” by closing tax loopholes and increasing taxes on the wealthy. Many economists believe it’s okay for the government to spend beyond its means during a recession, but in the political climate of the moment, with all the discussion about our national debt, I understand why Obama feels the need to insist his plan will be “fully paid for” immediately.
How Obama plans to get Republicans in Congress – the the majority of whom have signed a pledge saying they won’t raise taxes, ever, on anyone – on board with these tax increases is a mystery to me. My prediction is that the legislation won’t pass at all or, more likely, it will pass but without the tax increases needed to fund it.