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Wednesday, December 09, 2009

The Administration’s Job Creation Proposal is Inadequate

At CBS MoneyWatch, a brief summary and evaluation of the president's job creation proposal:

The Administration’s Job Creation Proposal is Inadequate, by Mark Thoma: The president unveiled his job creation strategy yesterday, and it contains three main elements, tax incentives that encourage small businesses to hire more workers, more spending on infrastructure and other large projects, and rebates for consumers who invest in energy saving improvements for their homes (the so-called "cash for caulkers" program).

How will this program be financed? According to Robert Reich, the plan is to use $70 billion of the recent unexpected $200 billion in savings on the TARP program arising from new estimates of the program's cost.

This proposal is not very specific, and if it makes it through the legislative process it will likely change quite a bit. But as it stands there are three problems with it. First, it does not create jobs directly, all job creation occurs indirectly through incentives such as reduced capital gains taxes for small businesses, other measures that make investment cheaper, rebates for home weatherization, etc. The program relies upon people acting upon these incentives, which they may or may not do, and even if the incentives are acted upon job creation is likely to be slow due to its indirect nature. Second, the amount, $70 billion, is too small to make much of a difference given the size of the unemployment problem. Third, it's disappointing that one of the best job creation/preservation measures the administration could have proposed, more help for state and local governments battered by budget problems arising from the recession is not part of the proposal. [Summary of various types of job creation strategies]

We need more direct and more immediate job creation than this proposal puts forth, and we need a much larger job stimulus package to make a noticeable dent in the problem. The argument for the package as announced is that this is the most that the administration can possibly get, anything larger or involving direct hiring won't be politically feasible due to worries over the deficit and worries that direct hiring amounts to wasteful "make-work" (a view I disagree with).

Thus, given the meager size of the proposal and the manner in which it is structured, it seems that this is intended more for its political effects than for its economic effects. The attempt is to tell workers, small businesses, and others that the administration cares about them, it "feels their pain" to borrow a phrase from a previous administration.

But I think this strategy is a mistake both economically and politically. Economically, it leaves people unemployed who could be working and paying taxes, an unacceptable outcome given the struggles unemployed households face. Politically, if the administration and congress are going to do another stimulus package, it needs to be large enough to make a difference.

In the end -- which for a politician means the next election -- people won't care that Obama threw a speech and a few billion dollars their way, that he understood the difficulties they face. People want action, some demonstration that the administration understands the problem and has done what is needed to fix it, and measures intended purely for their political effect won't get us there. Perhaps the plan is to blame Republicans for preventing more aggressive programs if jobs are still a problem as the election approaches, but I don't think that will work, particularly since Democrats do not appear to be willing to fight tooth and nail for a larger package. If jobs are not forthcoming, it's the Democrats not the Republicans who will face the wrath of voters. [Permalink]

    Posted by on Wednesday, December 9, 2009 at 10:45 AM in Economics, Fiscal Policy, Unemployment | Permalink  TrackBack (0)  Comments (27)


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