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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@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