President Obama will pivot to job creation in a speech tomorrow, so there’s lots of speculation on what he should prescribe to boost the economy. His task is urgent, but he’s also facing threat of a double dip recession along with stagnant job growth. Because he is coming up against an intransigent Republican Congress though, the President might have to compromise on some of his goals, there is still a lot of uncertainty about what Obama will propose.
What Obama Should Do
Many are looking back at the Great Depression as a model for the Great Recession. In the Depression, the small stimulus enacted by FDR was only enough to stop the tide of job losses and financial havoc. It was not until after World War Two started and the federal government financed its war effort through substantial debt that the economy began to recover.
Economists and politicos are therefore calling for across the board spending increases financed by increased levels of short term debt. Kevin Drum of Mother Jones, for example, calls for a trillion dollars in infrastructure investment. Given that American infrastructure is literally falling apart at every level, this is a perfect time to invest in its improvement. This timing is especially perfect because short term interest rates are essentially zero, meaning that (unlike any other time in history) America can finance these projects at very low long-term cost.
Drum continues, pointing out that in World War Two, “spending was for war materiel [sic] that was completely useless to the U.S. economy. If we repeated this today, we could do better than that even if half the stimulus spending was meaningless makework.” In other words, guns and bullets — though useful in a war effort — cannot be reinvested into the economy. Things like better infrastructure, though, do help the economy as a whole, making infrastructure investment something that helps not just those who get jobs, but anyone who uses a highway or uses electricity. And because of low interest rates, this would be of little cost to future generations.
Economists are urging a big bill — even bigger than the 2009 stimulus. Bradford DeLong, Berkeley economist, recently said in a speech that the “risks of doing too little now appear to be much larger than the risks of doing too much as far as gap-closing is concerned.” Likewise, Nobel Prize winning Princeton professor Paul Krugman argued that the 2009 stimulus was much too small and further efforts to boost jobs should be substantially larger.
Though increased debt has become a popular Republican talking point, this kind of policy has an inherent appeal to broad constituencies. Indeed, it is not just the favorite of economists, but also is supported by most Americans and even the bond markets. NPR reports that “even the U.S. Chamber of Commerce, which has attacked most of Obama’s economic policies, supports such plans for “rebuilding our economic platform.” These projects are politically popular outside Washington because they create jobs at the state and local levels, in both the public and private sectors.”
What Is More Likely To Pass
Unfortunately, because of the public backlash against the (ironically) tax-cut-heavy and light-on-direct-spending 2009 stimulus, Obama’s hands are tied against a huge spending push. A few policy remedies have been floated as politically salable and effective.
Avoiding the debt battle
At The New Republic, Robert Shiller comes up with a way to avoid the toxic political issue of increasing debt while still increasing spending: increase taxes on those who are already working and use the extra money to fund government jobs. This will increase consumption because “the unemployed who now get jobs will likely quickly spend all the money they earn on new consumption, since they have been strapped and now have jobs. The currently employed, who will see their taxes go up, will likely not cut their expenditures as much because they are habituated to their current level of consumption.” This kind of plan might be more salable to moderate Democrats, who are afraid of increasing the national debt.
Obama’s plan will therefore likely revolve around tax incentives and reducing regulation. NPR reports that these programs include tax cuts for employers, extending the payroll tax holiday, extending unemployment benefits, and reducing regulations on businesses. Unfortunately, many of these policies are unlikely to work.
Bruce Bartlett (a former Ronald Reagan and Ron Paul economic advisor) argues that a payroll tax holiday is less likely to help the jobless than direct spending, as argued above. In terms of increasing employment, “public works would be the best way of doing that. Under current economic conditions, all tax cuts are essentially passive and do almost nothing to increase aggregate demand or economic output.” This argument therefore holds for all kinds of tax cuts, even those for employers.
This leaves Obama with reducing regulations on businesses. Though many conservatives argue that unnecessary regulations are keeping Americans jobless, this does not really seem to hold water. It turns out that business investment has actually gone up since Barack Obama became president, returning to pre-recession levels. It is therefore difficult to argue that the reason why so many Americans remain unemployed is because businesses are too regulated to invest in new workers. Also, in recessionary times sometimes regulations can actually increase consumption, creating jobs as opposed to killing them.
Hopefully, when Obama presents his jobs plan this Thursday, it will include much more of the former — direct spending — and far less of the latter — ineffective tax cuts. Some are already saying, though, that the President has more tools in his box than he lets on, and that if Congress cannot pass anything meaningful on the jobs front, Obama can find other remedies to the current unemployment crisis.
Photo from Bytemarks via flickr.