Here is the President’s new economic proposal, which he is not calling a stimulus:
I. Accelerating near-term job growth
- “More money for infrastructure: highways, transit, rail, aviation, and water.” The explicit listing in significant in the legislative process. In the fact sheet they also emphasize broadband networks.
- “Support for merit-based infrastructure investment that leverages federal dollars.” I don’t know what this means in practice.
- “Rebates for consumers who make energy efficiency retrofits” [to their homes].
- Expanding those energy efficiency and clean energy manufacturing programs “for which additional federal dollars will leverage private investment and create jobs quickly, such as industrial energy efficiency investments and tax incentives for investing in renewable manufacturing facilities in the U.S.”
II. TARP & Fiscal discipline
- [Claiming to] redirect TARP savings “to work on Main Street” – This is a gimmick. “The … steps the President took to stabilize the financial system have reduced the cost of TARP by more than $200 billion, providing additional resources for job creation and for deficit reduction.”
- “Exploring a range of steps to take as part of the FY2011 budget process.”
III. Long-term job creation
- Extending unemployment insurance.
- Extending the COBRA health insurance subsidy.
- Providing another $250 payment to seniors and veterans.
- More funds transferred to state and local governments.
This package seems driven largely by Members of Congress trying to satisfy their political need to be seen as doing something while the economy and job growth are weak. It is trying to work on two levels:
- It’s trying to stimulate macro demand through traditional deficit-increasing fiscal stimulus measures: infrastructure and clean energy spending, plus all the transfer payments. In this respect it roughly parallels February’s stimulus law.
- It’s trying to increase the supply of capital and labor, but to small businesses only, through the hiring tax credit, zero cap gains, and depreciation incentives.
I think policymakers will struggle most with the hiring tax credit. We looked at it a couple times during the Bush Administration and could not find a version with more benefits than costs. How much is a temporary reduction in compensation costs going to encourage a small business owner to hire an employee? In my simplistic view, expected future demand for a firm’s products is far more important. On a macro level, job growth follows GDP growth, and it anticipates future GDP growth. Thus, if you want near-term job growth, figure out how to increase GDP growth. It’s difficult for government to quickly increase the number of people hired, holding the future path of GDP growth roughly constant. The most effective and efficient policy lever for GDP growth and therefore job growth is the Fed Funds rate, but that’s tapped out, so policymakers are struggling to find other levers.
They will also have a problem with churning – you fire me, then immediately rehire me to get the tax credit. To address this, the President proposed a new tax credit to hire and keep employees. This means subsidizing jobs “saved” in addition to those “created.” This tries to address the churning problem but exacerbates the inefficiency problem. I think they will find that most of the tax benefit is inframarginal – they will be subsidizing hires (or keepers) that would have occurred anyway, so the marginal number of new hires resulting from this policy will be small relative to the dollars spent. They will probably get very little bang for the buck. Finally, they will create all sorts of ugly distortions if they limit the incentive to small businesses. This targeting is a politically popular way to keep the budgetary cost down, but I am just as happy if people now unemployed get hired by big firms as by small firms.
This package looks like the President is giving a green light to House allies who are developing their own bill, as long as the bill includes a few of the President’s priorities. I expect the bulk of the money in a final law would be in bucket #3 – the extensions of UI benefits, health insurance subsidies, the senior-pandering checks, and the transfers to state and local governments.
Bucket #1 includes the President’s priorities, and I expect reflects his primary message points over the next month or two: small business, infrastructure, and clean energy. These are easy demands for Congress to fulfill.
Bucket #2 is empty – the President is telling Congress they don’t have to offset the new spending and tax relief with other spending cuts or tax increases. They can claim that TARP repayments reduce the deficit to offset the new proposed deficit increases. That’s a gimmick, but it may work to cloud the deficit question. I expect a $150ish B deficit increase.
Inferring from the speech, prior signals from the White House, and other sources, this announcement looks like the result of the following White House logic:
- Whether we want them to or not, the House is going to pass something that they can argue will help job growth.
- We can either get on board and try to shape it, or get run over by it.
- Let’s try to shape it and take some credit for it.
This logic is not partisan – we (Bush team) were often faced with a similar dilemma.
The primary difficulty for Team Obama will be how they integrate this with their overall economic message. This law will probably make their policy and communications jobs harder, not easier.
Here are some challenges this bill creates for the Obama White House:
- The structure of this package is quite similar to the $787 B stimulus. This makes it hard for Team Obama to argue this is not a second/third/fourth stimulus.
- It therefore undermines their argument that their prior policies are working (or at least sufficient.)
- The bill would increase the deficit a lot (most are guessing around $150 B, a big number) when the policy and political pressure is strong and growing for deficit reduction. (See this article for an example of the policy challenge.)
- The infrastructure spending and grants to states will in all likelihood face the same challenges we have seen all year: they are in general slow, inefficient, and prone to fraud and embarrassing revelations.
Prior to the President’s speech, action on a “jobs bill” was most evident in the House. The Senate is busy with health care, and Leader Reid does not have floor time to devote to this in December. We now have a rough Obama-House Democrat alliance. I expect Senate Democratic leaders will soon come on board, leaving Congressional Republicans with their own challenges:
- They will be politically inclined to oppose it, and have remained remarkably unified in their opposition to the President and Democratic majority’s stimulus proposals so far. But some will like the small business incentives, many will (semi-secretly) like the infrastructure spending and try to get a piece of it, and nearly all will support the transfer payments.
- Some Republicans will want to sign on board and “improve” the package, either for policy or political reasons. Republican leaders will need to decide whether to oppose the package straight up, oppose the package and develop a Republican alternative, or negotiate a compromise with Democratic leaders. I’ll bet they do the second.
- I think they will also focus on the deficit impact and argue that the economic benefits of the President/House Democrats proposal are small, while the deficit impact is large.
This looks like a smaller version of the original stimulus law. Its origins are more political and fulfilling a legislative need, than policy-driven.
- I’m OK with the UI extension and extending the health insurance subsidy, although I wish both were better designed.
- I generally support tax relief, but I am concerned the targeted capital gains reduction will give some cover to let the broader capital tax rates jump at the end of 2010. That would be very bad.
- The spending programs will have little near-term GDP effect, and so should be evaluated in how they meet other policy goals. They’re largely ineffective as immediate stimulus, because government spending is slow.
- The $250 check to seniors was pandering the first time Congress passed it (on a broadly bipartisan vote). It’s still pandering. Why are seniors more deserving of aid than, say, a low-income working family?
- The “using TARP dollars to help Main Street” is a transparent gimmick. If you’re going to increase the deficit, it’s better just to stand up and say the deficit increase is worth the short-term economic benefit you think will result from the other policies.
I suggest they do a targeted bill that contains only the UI and COBRA provisions, because I think the large deficit impact of the other provisions, relative to their small macroeconomic benefit, isn’t worth it.