What does it mean to focus on jobs?

The conventional Beltway logic is that the President used his State of the Union Address to “pivot to focus on job creation.”  We have been told for a week or two that job creation is policy priority #1.

The Administration’s original game plan was to have health care reform finished or nearly finished by now.  The President would begin 2010 signing health care reform into law and would spend the bulk of the year working on reducing the high unemployment rate.

Scott Brown’s election and the subsequent collapse of health care reform have fouled up that sequence.  Nevertheless, Wednesday night the President “pivoted to focus on jobs.”

That is why jobs must be our number one focus in 2010, and that is why I am calling for a new jobs bill tonight.

I have a simple question:  What does it mean to focus on jobs?

I would presume that it means the President would propose new policy changes that are designed to significantly increase employment, and fairly quickly.

Reviewing where we stand today:

• The unemployment rate is 10.0%, twice my rule-of-thumb full employment rate of 5.0%.  (Others might use as high as 5.5% for full employment.  Either way we face a huge employment gap.)
• That measure understates the number of people who would like to work but don’t have a job, because many have stopped looking.  They are not counted in the 10% number.
• About 2.7 million fewer people are employed today than one year ago, and about 7.2 million fewer people than at the beginning of the recession in December 2007.  Since the labor force grows along with population, we would need more than 7.2 million new jobs to return to full employment today.
• The change in both the number of people working and the unemployment rate are bouncing around zero:  a net 85,000 jobs were lost in December, and the rate stayed constant.
• Economists are divided about whether the employment situation:
  • has bottomed out and will soon begin to steadily but gradually improve;
  • has bottomed out and will soon begin to improve, but will tip back downward in the second half of this year as stimulus spending tapers off; or
  • is still declining and will continue to decline before things turn around.
• CBO’s recently released economic and budget baseline projects the unemployment rate will be 10.0% in the fourth quarter of this year, and 9.1% in the fourth quarter of 2011.  CBO projects the rate will not drop below 8 percent until 2012.  Those are unsurprising but dismal projections.

The President’s proposal and the new focus

Last December the President proposed a new “jobs package.”  Last night he added two policies to that package:

• “take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat;” and
• a new $5,000 “Small Business Jobs and Wages” tax credit for every net new employee they employ in 2010

Everything else in the President’s proposed jobs bill had already been proposed about six weeks ago.

Q1:  What, then, is the new focus?

A:  Two policies, and a reprioritization of legislative goals, with this bill as the new top priority.

I think there is an extremely high likelihood that this reprioritization will result in a signed law soon (I will guess within 4-6 weeks.)  The House has already passed a bill, and the President called on the Senate to take this up first.  The President’s State of the Union address and this signal to Congress will therefore have a real legislative effect.

Q2:  How much would the President’s new proposal increase employment?

A:  Assuming I’m reading CBO correctly, the President’s new “Small Business Jobs and Wages” tax credit would increase net employment in 2010 by less than 300,000 new jobs, and possibly much less.  The employment effects of the other components are difficult to estimate but almost certainly are much smaller than the impact of the tax credit.  Those are very small numbers compared to the size of the employment gap.

Bang for the buck

Anticipating this policy debate, two weeks ago CBO published an interesting report, Policies for Increasing Economic Growth and Employment in 2010 and 2011.  They have a great table (Table 1 on page 18) that shows their estimates for the GDP and employment effects of various job creation policies.  One policy closely matches the President’s new tax credit, and the White House fact sheet highlights the study:

The Congressional Budget Office recently identified this type of job creation tax cut as the most effective way to help accelerate job growth of all the policy options it evaluated.

The White House fact sheet leaves out the numbers.  Here they are:

• CBO estimates that for each million dollars of budgetary cost for this kind of tax credit, full-time employment in 2010 will increase by five to nine years.  I’ll explain the difference between increased years of employment and increased jobs in a moment.  That works out to $111,000 to $200,000 of taxpayer money (or deficit increase) per new employment-year, and more than that range per new job created this year.
• Over the two-year period 2010-2011, CBO says that for each million dollars of budgetary cost for this kind of tax credit, full-time employment will increase by eight to eighteen years.
• The White House fact sheet says the budget impact of the President’s new tax credit proposal will have a budgetary cost of $33 billion.

My back-of-the-envelope calculation using these numbers suggests that the President’s new Small Business Jobs and Wages credit will increase full-time employment in 2010 by 165,000 – 297,000 years.  By 2011, it will increase full-time employment by 264,000 – 594,000 years.  But the number of jobs created will be smaller, because some of these additional employment years will be captured by longer hours for existing workers who are working historically short work weeks.  Employers tend to make underworked existing employees work longer hours before they hire new workers.

If enacted quickly, the President’s new Small Business Jobs and Wages tax credit proposal will therefore create fewer (and maybe far fewer) than 165,000 – 297,000 jobs this year.  For comparison, remember that the U.S. economy has lost 2.7 million jobs since a year ago, and 7.2 million jobs since the beginning of the recession in December 2007.  297,000 is 4.1% of 7.2 million, so you’re talking about a policy change that at best would restore fewer than 1 out of 25 jobs lost since the recession began.

Now for the bigger problem:  the White House fact sheet is correct– CBO says this is the job creation policy with the greatest job creation bang per deficit buck.  Other policies are less efficient.  So while the total 2010 jobs impact of the President’s full proposal will be larger than just the impact of this new credit proposal, it’s still going to take only a tiny bite out of our employment problem, and the other components will have an even smaller effect than this core element.

I am not comfortable extending my back-of-the-envelope calculation to the President’s full proposal, but someone in Congress should ask CBO to apply their methodology to the President’s full package.  Members of Congress should understand not just the policies they are voting on, but the projected quantitative impacts of those policies on employment, GDP growth, and budget deficits.  The numbers matter.

Expected outcomes

CBO’s new baseline projects that, without new policy, the unemployment rate in the politically significant fourth quarter of this year will be where it is now:  10.0 percent.  Economically that’s terrible but not unexpected, given the depth of the recession.  Politically it’s disastrous for Democrats because it suggests the employment picture will not improve this year.  Further, CBO projects the unemployment rate in the fourth quarter of 2011 will be 9.1%.  As both a policy and political matter, this explains why the President and Members of Congress are desperate to do something, anything.  Like a panicked Homer Simpson trying to prevent a nuclear meltdown, Congress is about to start wildly pressing buttons and turning dials on their control panel, almost all of which will have no beneficial effect.

A couple of weeks ago economist Dr. Mark Zandi testified before the Financial Crisis Inquiry Commission at its first substantive hearing.  I took that opportunity to ask him about fiscal stimulus and job creation.  I asked him what his baseline forecast for the unemployment rate was at the end of this year.  He said about 10.5%, half a percentage point higher than it is now, and half a percentage point that CBO now projects.

Dr. Zandi advocates a new fiscal stimulus package (which apparently we are now calling a jobs bill.)  I asked him to imagine that Congress enacted the best job-creating fiscal stimulus legislation he could reasonably expect.  How big would such a package be, and what effect would it have on the unemployment rate?

Dr. Zandi hypothesized enactment of a new $200 B law, spread out over 2010 and 2011.  He stressed that the primary economic benefit would be to reduce the chance of a double-dip recession as the first stimulus tapers off later this year.  When I pressed him for what he thought the resulting unemployment rate might be, he said 10 percent.

So this oft-quoted economist is estimating that a new job-creation stimulus law would increase the deficit by another $200 B, reduce the risk of a double-dip recession, and reduce the future unemployment rate by only about half a percentage point.

There is a policy tradeoff between employment impact and deficit increase, centered around the relative inefficiency of policy changes at increasing employment.  There is no analytically “right” amount of federal resources to commit to new fiscal stimulus.  Dr. Krugman has long been arguing for another very large stimulus, prioritizing GDP growth and reducing unemployment over an admittedly large further increase in the budget deficit.  Dr. Zandi is making a similar argument, but in a smaller numeric range.  President Obama is doing the same, but in an even smaller range than the Zandi $200 B number (I think).  I expect some Congressional Republicans will argue that we should not increase the budget deficit with policies that are so inefficient at creating jobs.  Well-intentioned people can disagree on this policy tradeoff.

Jobs policy, politics, and messaging

Those who cannot remember the past are condemned to repeat it.  – George Santayana, The Life of Reason Vol. I

The hard policy question is whether in the current economic environment you do something that is directionally correct but trivially small, and at the same time is very expensive.  Everyone’s political instinct is that doing something is better than doing nothing.  What makes it hard is that this something is expensive and we have a huge budget deficit.  Action has a small policy benefit and a medium-sized cost.  Inaction has no policy benefit and no policy cost, but a big political downside because you look like you don’t care about the problem.

By saying that jobs are “our number one focus in 2010,” and by having a specific legislative proposal that is likely to become law, the President is once again raising expectations that he can deliver improved economic results.  Just over one year ago now-CEA Chair Christina Romer and now-VP economic advisor Jared Bernstein projected that enactment of a stimulus proposal would reduce the unemployment rate so that it would peak at 8 percent.  This optimistic projection helped sell the stimulus and later proved to be wildly inaccurate.

The risk to the President is that he repeats this political and communications mistake, whatever your view on the policy.  By making jobs his number one focus, he raises expectations in the Nation and in the Congress that policy changes can quickly make things much better.  They cannot unless you’re willing to do far more aggressive policy than the President has proposed.  Doing so would have somewhat larger GDP growth and employment benefits, and enormous deficit costs.

At the same time, to lower expectations he must explain that his policy proposal to focus on jobs will have only a minimal benefit, and will result in a still dark employment picture for the foreseeable future.  That’s a pessimistic message that could undercut his ability to enact his proposal.  He is boxed in by a painful policy reality.

The President and his Congressional allies are courting political disaster by raising expectations that their new “number one focus on jobs” will result in a measurably improved employment picture as we approach Election Day.  They better start lowering expectations fast, because they are setting themselves up (again) for political failure.

(photo credit:  White House photographer Pete Souza)

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