The case for Obama’s jobs program

By Betsey Stevenson
September 9, 2011

By Betsey Stevenson
The opinions expressed are her own.

What should we make of the President’s new jobs plan? Ignore the politics — will it pass? — and focus on the economics: If it does, will it get Americans back to work?

The centerpiece is a series of sharp payroll tax cuts. The usual problem with payroll taxes is that they largely subsidize existing workers. But this plan — three separate payroll tax cuts — is different.

The first tax cut is the most innovative: No payroll taxes at all for firms increasing their wage bill. In economics, all the action is at the margin. If we want people to do more at the margin — hire more people — then the incentives to do so should be targeted at the margin. We will get much more bang-for-our-buck by giving the biggest tax breaks to the hiring of extra workers.

Second, there’s bigger cuts targeted at small business. The logic here is simple: these are the firms whose hiring is most likely constrained by their cash-flow.

Third, the package extends and expands the current payroll tax cuts for workers which would otherwise have expired at the end of the year. Tax cuts for low income folks generate substantial further spending. In ordinary times middle class families usually don’t spend as much of each extra dollar, but these aren’t ordinary times. With one-in-eight families directly affected by unemployment last year, it’s likely they’ll be a bit more likely to spend the extra money. And even if people don’t spend the extra dollars, it will help them work off the debt overhang that is holding back spending.

Beyond payroll tax cuts, there’s infrastructure spending. There’s a good case that more roads, better schools and improved Internet access are a good long-term investment. Better to do it today when we have so many construction workers to build these things, than to wait until later when the cost will be higher. And with negative real interest rates, there’s no case for delay — these investments will simply never be this cheap again.

But the case for infrastructure spending goes well beyond getting workers on the job today. While many people worry about saddling our children with our debt, I worry about saddling them with our current infrastructure and the low economic growth that it leads to. The best way to solve our debt problem is to grow the economy and we can’t do that without better roads, bridges, Internet access and schools.

The President also proposed continuing to pay unemployment insurance to the long-term unemployed. The evidence on unemployment insurance is clear: a dollar paid generates two dollars in economic activity. It’s social insurance plus stimulus, helping one family put food on their table while unemployed, and another family gets or keeps a job.

Finally, there’s a package of innovative reforms to improve the unemployment insurance system. Having been part of the discussion, I can say that this is the triumph of boring empirical work rather than any over-arching ideology. We know that job search assistance works, and it’s being expanded.

There’s also real experimentation, with new programs to encourage workers and firms to try each other out. While interest groups may not like this, the long-term unemployed who find new jobs will. And I am hoping we learn something about how to run a better unemployment system in the future.

How big of an effect will all this have? I dusted off the empirical analysis by Dartmouth’s James Feyrer and Bruce Sacerdote of what worked in the Recovery Act. I then plugged in the parameters of this new Jobs Act. If it passes, it will create between 2½ and 4 million jobs, reducing the unemployment rate by up to a couple of percentage points.

I’m not promising miracles, though. Remember, these are improvements, relative to what would have happened anyway. Yesterday I was worried about stagnant unemployment and a recovery moving at glacial pace; with this proposal I think we can pick up the pace and see moderately falling jobless rolls instead.

The biggest risk in all this is that this re-ignites the poisonous dynamics of the debt-ceiling debacle, which killed consumer confidence. That’s why the politics really do matter. The President didn’t gear his proposal to make his base happy, instead these are ideas that have all been endorsed by leading Republicans, which is hopefully enough to bring them to the bargaining table. I’m optimistic.

23 comments

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[...] — Some were optimistic. …President Obama's Jobs Creation PlanFox News (blog)The case for Obama's jobs programReuters Blogs (blog)all 50 news [...]

Dr. Betsey, what do u think about taxing outsourcing?

Posted by robb1 | Report as abusive

Refreshing.

BetseyS: You having worked at the Dept of Labor and teaching at these top business schools, how do you foresee job growth and economic change in light of current infrastructure in place in terms of – unregulated free-trade with near-zero duty-free imports, three way job-drain via – offshoring, H1-B cheap labor and illegal in-flow to replace current jobs and obstruction of funds for – education and innovation?

Appreciate an article on what it takes over time, to secure the future of next generation and a perspective on how things will shape up over the next 40 years as the population nears 10 billion around the globe.

Posted by Mott | Report as abusive

#1 Stop calling PEOPLE folks, its like me calling her
babe or sweetie.
#2 If these plans are SO great where were they and why didn’t you say this 3 yrs ago? huh?
#3 Appealing to UNION thuggery………………….

Posted by KoolAid | Report as abusive

Will someone please ask Mr. O to refrain from giving speeches? His last two resulted in average Dow losses of 500 points. Every word he utters costs me money.

Posted by dpendable | Report as abusive

[...] The centerpiece of the president’s proposal is a series of sharp payroll tax cuts. The usual problem with payroll taxes is that they largely subsidize existing workers. But this plan — three separate payroll tax cuts — is different.  ary [...]

dpendable, if you follow the markets, which your post implies you do, you ought to know that yesterday’s selloff had a whole lot more to do with European debt problems than Obama’s campaign speech.

Posted by PCScipio | Report as abusive

“I dusted off the empirical analysis by Dartmouth’s James Feyrer and Bruce Sacerdote of what worked in the Recovery Act. I then plugged in the parameters of this new Jobs Act. If it passes, it will create between 2½ and 4 million jobs…”

So you selectively looked at just the part of a previous analysis that worked, in hindsight. Now you have a new analysis that says 4 million jobs are created. Your model is only as good as the previous model, and now conditions are different.

Bad generals gear their armies up to win the previous war. Bad economists use models to solve previous crises. I’m much less optimistic.

Posted by Sensibility | Report as abusive

Dear Betsy,
You say, “I’m not promising miracles, though”. Who are you to promise anything? And isn’t it intersting that REDUCING THE TAX BURDEN equates to millions of jobs! That’s what Republicans have been SAYING ALL ALONG.

Posted by stacylaw | Report as abusive

One more ting….employers hire people because they need them to make products that fill a demand. Is there a demand for products that require the hiring of millions of people in order to manufacture them?

Posted by stacylaw | Report as abusive

@ Betsey,

Come on now, this is just an ideologically stifled piece.

It’s full of silliness and misrepresentations.

For example, who are you kidding with, ” a dollar paid generates two dollars in economic activity.”

The truth is to the contrary. Increasing UI, as has repeatedly been done over the years, coagulates the Entitlement mindset. Too many just stop looking for work and unemployment ranks swell irreversibly.

Posted by Anonymous | Report as abusive

Is someone going to point out the flaw in stacylaw’s logic? I keep waiting.

Okay – stacylaw,

As of 2010, 76.8% of the U.S. GDP (Gross Domestic Product) is in the services industry. I don’t know what percentage is outsourced. The service industry includes cashiers, bankers, wait staff, airline pilots…it goes on.

Just over 22% of the GDP is in industry.

Incentivizing corporations to bring/keep jobs in the U.S. is a large part of the answer, and I saw that in Obama’s plan, among other things.

Posted by JL4 | Report as abusive

What exactly do you mean by “the poisonous dynamics of the debt-ceiling debacle”?

Yes, there is venom in online and public debate nowadays, and I don’t like it either.

And the debt CEILING doesn’t mean much.

But the actual DEBT, which is now so high it can never be repaid to bondholders, is real. It’s not some poisonous snake Republicans or Libertarians brought to Congress and set loose on the floor to scare everybody.

Paying the interest due on the US bonds that have kept all our social programs and our military afloat for the past 40 years will become impossible once interest rates go up. As they will have to do eventually.

We are frickin’ broke! It’s the truth. It almost doesn’t matter anymore what the pols do or don’t do. They’ve already destroyed our economic future. Demos, Republicans, all of them, for the past 40 years of spend spend spend and damn the consequences.

The party’s over.

Posted by NewsLady | Report as abusive

Dear Betsey S.
I wonder if you realize with how much bias your article is written.

Curious if when you dusted off the analysis from the Recovery Act, did you trip accross the proposals from Republicans about cutting payroll taxes? The ones that got sidelined in 2008… But I digress.

“While many people worry about saddling our children with our debt, I worry about saddling them with our current infrastructure and the low economic growth that it leads to. The best way to solve our debt problem is to grow the economy and we can’t do that without better roads, bridges, Internet access and schools.”

Are you serious? Do you realize that it is the debt that is hindering the growth in our economy? Do you realize what we could do with the money being spent on interest alone? Who would grow your economy – your kids on their pretty roads? So we spend the money to make their internet faster but they need to do the get out of debt part. Wow. Growing the economy with a growing debt is not solving anything. We need to stop the debt and reduce spending within our income- that’s “margin” for you :). Let’s get people to do more there.

Posted by whodawhatta | Report as abusive

Just to get a little bit of perspective on debt. The US government debt is around $15 trillion. Government income is around $4.5 trillion, so the government owes about three and a half years of its annual income. I have a mortgage on my home, a small one by local standards (australia) around $130,000,that works out to about three and a half years of my annual income, my repayments are easily managed (even at the current interest rate of 7.85%) and i have ample money left over for discetionary spending. No debt is good debt, but sometimes its necasary even vital. The United States is far from broke. And never forget it costs much less to save a job than it does to create one.
Cheers

Posted by docca | Report as abusive

In a japanised economy there aren’t easy fixes, like central banks soaking us with liquidity and governments throwing money around to “jump start” the economy. Both have run into the stops. America has become too lazy and it will take some time to realise that this time around it isn’t going to borrow its way out. It’ll have to be done by becoming competitive again: education and infrastructure – not things that will work short term, but it was long overdue – are where to apply your energy.

And ignore redneck rantings about tariffs and combating outsourcing. The U.S. has to put its house in order and clean up the appalling mess left behind by messrs Bush and Greenspan.

Posted by Lambick | Report as abusive

Quote from the article: “The best way to solve our debt problem is to grow the economy and we can’t do that without better roads, bridges, Internet access and schools.”

It would be more correct to say “we can’t do that without jobs”. I don’t think it is the actual infrastructure that is freezing economic growth.

So the problem becomes how can America best create jobs. Building infrastructure might be an element of the solution to that problem, but to discover the best solution, we should consider the real problem, not an implied corollary.

I think our nation’s declining economic growth could be more accurately attributed to:

- an obscene concentration of our nation’s wealth
- an obscene concentration of our nation’s debt
- technological advances that eliminate jobs
- globalization

Embarking on a government-funded program that builds infrastructure will help a little with the concentration of wealth aspect of the problem. As in all solutions to all economic problems, there is a downside.

We need to broaden our scope if we really want to find the best solution… and maybe there will be no good solutions until the piper has been paid.

Posted by breezinthru | Report as abusive

Madame, it is bean counters of your very ilk who brought us to this precipice with an unwavering penchant for short term paper profits at great expense to long term fiscal health, and who now lead the rallying cry of, “Let’s buy ourselves out of debt with a credit card”.

It won’t work kid, not now, not ever. Disregard the years of hogwash implanted in your cranial crevices by ivory tower dreamers and take this little tidbit from an old warhorse businessman. There are only two ways to refloat a sinking economic ship, decrease expenses and/or increase revenue. And sure as Hell DO NOT send off for more credit cards or apply for a new bank loan.

We live in a great country and exciting times. We have the vision and we have the strength to tighten our belts, slash extraneous budgets, implement measured tax increases, and get back to living within our means.

Or, we can borrow more money as you suggest, in which case all hands to the lifeboats, women and children first, and for those who can’t swim, you’re about to get your first lesson.

Posted by CaptnCrunch | Report as abusive

The author misunderstands what FICA contributions (what she calls the “payroll tax”) are really about. FICA contributions are deducted for the sole purpose of funding the Social Security program. The finances of Social Security, are, by law, kept *completely separate* from the finances of general US federal government expenditures, and are NOT a “tax” in the usual sense of the word. FICA contributions collected from each US worker are kept earmarked to later pay that person’s Social Security benefits after they end their working years and enter retirement — that is the whole purpose for each person having their own unique Social Security number. The payback that each worker gets from Social Security after retirement is *directly related* to the amount of the FICA deductions that they paid in while they worked.

The effectiveness of reducing the amount of FICA contributions that employees and employers pay as an incentive for employees to spend more and employers to hire more might have merit. But what is missing is that is far too easy, as this author appears to have done, to sweep under the rug the fact that such an action is merely a means to Party Now at the expense of The Future. Reducing FICA contributions now means that money will not be available in the future to pay Social Security retirement benefits — there is no way around it.

It is ironic that this Democrat president is proposing actions that will have substantial negative ramifications for Social Security, traditionally one of the Democrat party’s most cherished institutions. Remember how the Democrats vilified GW Bush for the much-less radical proposal to merely allow workers the *option of setting aside* a portion of their FICA contributions into private retirement accounts? And yet this president gets a free pass from the author and others in the media when he proposes *eliminating* those contributions completely. Amazing!

Posted by Randy549 | Report as abusive

[...] The case for Obama’s jobs program | The Great Debate. [...]

I hope that Congress will create and pass legislation to implement the proposals that President Obama outlined — especially the much needed repairs and modernization of roads, bridges, schools, etc. for the revitalization of industry in our country and the safety of our citizens. The expense of investing in repairs and maintenance now is less than letting it crumble.

Posted by leslie20 | Report as abusive

What process for his ‘Jobs Plan’ would Mr. Obama undertake to have the bill passed by the congress and also what’s his proposal of refunding back the money taken for the purpose is not known yet as per many critics?

Posted by Shamsray | Report as abusive

Why would we trust the same “folks” that laid the foundation for outsourcing in the first place to do anything to bring jobs back? That’d be like trusting the same folks that use our Social Security as their piggybank to run our healthcare. LOL!

Posted by GLK | Report as abusive

@Randy549

Randy you’re completely wrong about FICA. It is in no way earmarked to an individual (although that was the original intent). Social Security benefits are also not directly related to how much FICA you’ve paid (in reality you earn credits with SSA, which maxes out quickly at just 10 years of work, and the benefit depends on the age you retire). Bill Gates won’t be getting a $1,000,000 check every month for his Social Security.

I think the source of your misinformation is the original legislation, which would have been directly tied to a individual. However, that was thrown out shortly after Social Security was created because there were millions of jobless people during the depression that needed the money immediately, not when they were 120 years old. They had paid ZERO taxes into FICA and still got Social Security and the problem has never been addressed.

Also when you compare Obama cutting FICA taxes to Bushes plan you’re comparing apples to oranges. Bushes plan was to allow private plans in place of Social Security. Guess who wins on that one? I’m guessing someone on Wall Street. That is in no way a elimination of FICA, it’s privatization, which Bush never denied.

Just to throw some more salt in your wound FICA isn’t just ‘for the sole purpose of funding Social Security.” Your forget Medicare and Unemployment. You’re just terrible.

Posted by joe1234 | Report as abusive

c`mon guys, focus on the big picture, the previous adminastrations (very expensive) fondness for international militatary adventures and ability to turn a blind eye to domestic issues (housing bubble)is the reason for the debt.
Remove these factors and the debt level would be to low to mention. Whats done is done,while the US is saddled with unnecasary
debt, it`s far from unmanageable, the situation needs to be dealt with, sadly that requires trust in the government of the day..the previous government asked us to go to war with no hard evidence, basicly they asked us to trust them, we did to our detrimement. The question is the new addminastrtion needs our trust to get back on top, what does our gut tell us?

Posted by docca | Report as abusive

What another half a Trillion dollars? Ya, we could cut a check to millions of Americans for $100,000.00 dollars each, but we wouldn’t be exercising our right to redistribute wealth to our favorite speciula interest now would we! Let’s spend, gamble our way out (call it progressive) and if we fail our kids should bring a pretty penny at auction! We’ll change when we hit bottom!

Posted by DrJJJJ | Report as abusive