What does it mean to focus on jobs?

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)

36 responses

  1. Mr. H,

    With an economy that is 70% consumption versus actually producing something, are we past a tipping point for which we can recover anywhere close to 7 million jobs?

  2. How about slashing the corporate income tax, permanently? I would think that would have a significant impact, and might not even cost that much since corporations are probably not paying much anyway right now.

  3. Suppose we killed the minimum wage, closed the EPA, killed the Wager act, and OSHA too. We could probably throw in a few others. (End the ADA, or reduce it to cover fewer disabilities). Would that be a "pro jobs" move? I'm not saying that would be wise, but couldn't one argue that part of the problem is that our regulations and mandates have made employment too expensive.

    • Killing the Wagner Act would be a great idea, so would eliminating the minimum wage ( few minimum wage earners are worth what they get paid. It would be better to pay them real market value and have earned income tax credit bring them to a minimum baseline income.) The ADA is a bit abusive and needs to be tightened up. The EPA is getting out of control as well and needs to be brought back to the straight and narrow along with OSHA. Besides the Wagner Act, the Davis-Bacon Act and the local and state analogs need to go as well. So does rent control and a myriad of politically motivated licensing restrictions and regulations and zoning restrictions. And finally 1/3 of all non essential government employees need to terminated and the rest get a pay and benefit rollback of 30% with pensions based on the baseline pay average over their entire time of service with payments starting at the same age as they would qualify for full social security. Eliminate the corporate income tax, corporate capital gains tax , inheritance taxes and one single low rate with no deductions other than a standard deduction for all forms of revenue with high enough personal deduction for the working poor. Tax all corporate revenue as a pass through to the shareholders even if the ultimate shareholder is another legal entity (to avoid unfairness and distortions). Go through the federal code and junk all antiquated laws on the books that no longer serve a purpose or are redundant or impede economic growth without a compensatory benefit greater than the economic loss it causes and the same for regulations. And finally rollback entitlements to the per person level of 2005 and freeze them until the economy recovers back to that level plus 20% along with eliminating physically able to work adults who have been on the dole for 5 years of the rolls. Privatize Social Security for those under 40. Amend the constitution that government (at all levels combined) cannot take more 15% of the total economic output except in war time and never for more than a 5 year period. Problem solved. What the country needs is a real maximum pro-growth economic, fiscal and tax policy that is coherent and holistic. Tom Harkin who is usually a typical idiot democrat once said something intelligent " the best social program is a job".

  4. Richard S …

    nice strawmen you got there … so the solution to too much regulation is NO regulation ? wow … way to contribute to the discussion …

    Permanent Corp income tax cuts and continuation of the Bush tax cuts or even greater personal tax cuts. If the Keynesians want to fire up the animal spirits then that would certainly do it.

    Another jobs / Stimulus bill will cause the voluntary or forced retirement of at least a dozen more Dems in the House in addition to the current announced retirements.

  5. Government has 2 fiscal policy tools: increasing expenditures or reducing taxes. In accord with your points, the effectiveness of spending programs on jobs creation appears to have been pretty inefficient in the last year.

    I wonder, however, if cutting personal tax rates would be effective at boosting GDP demand. I suspect much of any tax cut would be siphoned away to pay credit cards and mortgages rather than on new spending. While helpful to family budgets, we would get no GDP boost.

    Seems like we are boxed in.

  6. Where's the straw man? If we reduce the cost of employing people, employment will almost certainly increase. Irony is lost on some people, I suppose.

  7. One of the two seminal ideas of economics is Hayek’s notion of the fatal conceit: the belief by politicians and bureaucrats that they understand the economy and can control it. They don’t and they can’t. The only rational government response to a crash is Harding’s response to the crash of 1920 (strenuously opposed by then Secretary of Commerce Hoover): cut taxes, cut government spending, and get out of the way. The Harding crash was over in about a year. The Hoover/Roosevelt debacle lasted a decade and a half. The Bush/Obama debacle is underway.

  8. We are living out the economic analog of "2012" the movie;
    Flying that AN-500 out of LA was nothing compared to
    restructuring the economic *and regulatory* environment
    of small business, especially new Hi-Tech capital goods
    manufacturers, in time to save the day.
    Remove the bureaucratic red tape which binds creativity
    and innovation, create an explosion of new products, and
    surf the shockwave into the future.

  9. Yeah, I didn't see the straw man, either. Whether or not one believes the EPA is net positive or a net negative, isn't it silly to pretend that there are NO costs to an enormous regulatory regime in the US?

    Let's put it simply: if China and India can't grow with, say, the proposed cap and trade regime, how can we? Do economics magically disappear inside the US border? Has anyone gotten blood from a turnip, lately?

    Regulations, even good ones perfectly implemented in an imaginary world without politics, cronyism or corruption, have costs, not just benefits.

  10. Duke nails it. A tax credit is not a bad step, and definitely positive. But it will only help ceterus paribus, and…guess what?…all other things are not equal right now. The administration is making stupendously asinine decisions or threatening to, and the Congress is doing the same with asinine legislation. These two factors will more than overwhelm the effect of the tax credit and scare businesses right back out of hiring.

  11. No small business is going to hire anyone simply because of a tax credit. The fact that Obama and the democrats even propose such a stupidity is emblematic of their ignorance and incompetence.
    For those who never had to make a payroll here is the explanation: 1 new employee @ $30,000 per year costs the average small to mid-sized employer $39,000 per year when the FICA/FUTA, workman's comp, unemployment insurance, health insurance and other benefits are costed in the the cost of employing a new hire. That doesn't cover any training costs and lack of productivity while getting up to speed. That is why no small business is going to hire new staff unless there is a compelling business reason to do so and a five grand one time tax credit isn't it.

  12. "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."

    The opposite of a beneficial effect, most likely: as consumers and businesses see panic, they'll either panic themselves, or retrench. Both can make the economy even worse.

  13. One of my favorite 'what if.." scenarios for Congress (and I can't remember where I read it) is this:

    "Imagine, Senator, that in 12months, if the GDP hasn't had 2 quarters of at least 3.0% growth, and the unemployment rate hasn't fallen under 7%, we are going to hang you, and each member of your family on the steps of the Capitol building".

    The overly-dramatic point trying to be made is would that Senator be more inclined to produce a "Jobs Bill" with $5,000 tax credits and give stimuli to keep Peoria from having to lay off 2 assistant librarians— or would he instead dramatically lower tax rates (income and capital gains) speed up depreciation schedules for capex equipment, etc.

    They would all be Conservatives then.

  14. Pingback: A splash of cold water « Nebraska Redneck

  15. What does it mean to focus on Stimulus? We have had giant stimulus plans, starting with government sponsored lending to build houses, then Bush's $150 billion stimulus, the current $787 – $1,000 billion "Stimulus Plan", and now $200 billion in more stimulus plans.

    Here is the laugh. What was being stimulated? Jobs, of course. Will people really buy the change in words? "Before, we concentrated on stimulus, but now we are concentrating on jobs". Stimulus has been a massive failure, and more government spending to create jobs will fail also.

    After the government defaults on the US debt, or inflates the currency, or raises taxes to cover the immense debt, where will the market settle for goods and services? No one knows. But, there aren't enough resources in existence to bail everyone out at that time. Business owners who expand now are betting into the unknown.
    (continued)

  16. Business owners are being rational. It is better to miss some business by expanding later, or shrinking, than to expand early and risk bigger losses if sales drop. Ironically, stimulus interferes with the sales signals and market stability that would encourage businesses to expand. This slows expansion and reduces employment.

    The current stimulus is being distributed over a period of years, so it will interfere with business decisions and employment for years. Promises of higher taxes are also increasing risk and decreasing employment.

    We have recently emerged from a four year experiment in giant stimulus. The housing bubble WAS a stimulus bubble. The government borrowed through Fannie Mae and Freddie Mac to loan to people to buy houses (construction, consumer goods, appliances) and to re-finance housing to buy everything.
    (continued)

  17. The $2 trillion in sub-prime financing in the last four years delivered dollars to the people who spent it immediately on all types of stuff. That is a $2 trillion stimulus.

    We are living now in the "post stimulus" economy produced by that giant stimulus. How do we like it?

    That was the result when people promised to pay it back. What will happen now when more money is being handed out, with no hope of repayment? We have only the prospect of higher taxes on productive people, or high inflation, and probably both. Tax the rich, tax the middle class, and tax the poor.


    A Tested Stimulus Plan
    We just tried a stimulus through housing policy.

  18. Pingback: Thinking small « Stiffs and Georges

  19. A $5000 credit won't get me to add an employee. There's too much uncertainty as to how we're to address the massive spending orgy of late 2008 and all of 2009. IMHO, the only way for Obama to jump start job creation is to critically reassess his view of the relation between government and the private sector economy. His background is just way too narrow to bet on that.

    • This tax credit also rewards the creation of low paying jobs over higher paying ones. If I pay a new hire $75K, I get a $5,000 credit. If my competition hires 3 people at $25K each, he gets a $15,000 tax credit.

  20. Having been small businessman (we sold our business in 2007, just in a nick of time), I see a couple things wrong with the idea of a $5K tax credit for hiring an employee.

    First is that hiring an employee is now a pretty high-overhead proposition. There's benefits, withholding, additional tax issues besides the $5K credit – all these issues are still in place with or without the $5K tax credit. Unemployment insurance taxes in many states are going up – rapidly.

    Second is that we in the small business sector have little to no confidence in current economic outlooks. All manner of supposedly smart economists either didn't see this coming, thought it would be a minor ("normal") recession, etc. Very few people in finance and economics saw this magnitude of mess coming. So you'll have to pardon me if I don't believe a word they say about the timing, duration or breadth of whatever recovery we have.

    Third, there's no way in hell that with the huge amount of public debt being issued that interest rates don't go up in the future. Banks are very tight with lending to small business, and the possibility of being in debt when rates go up in the future makes me very wary of borrowing against any revolver or short-term operating loan. I'd rather hoard cash and avoid debt.

    Lastly: I'd be very cautious about exercising any tax credit from this administration or Congress. They've now shown that they're perfectly happy to go back and change the terms of a deal once a business has signed on. I'd rather not put my head into that particular noose – especially when I see such voter initiatives as what just passed in Oregon. There's no doubt in my mind that the Congress and many state legislatures are going to be raising taxes to fill their budget deficits, and the public is stupid enough to buy the populist nonsense that some small businessman reporting an income of $300K this year is "rich" – never mind that he had a loss last year, and might have a loss next year. No, if he had one good year out of three, he's "rich" and deserves higher taxes.

    • "Lastly: I'd be very cautious about exercising any tax credit from this administration or Congress. They've now shown that they're perfectly happy to go back and change the terms of a deal once a business has signed on."

      Good point.

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