Opinion

The Great Debate

The jobs proposal ignores economics

By David Callahan
September 9, 2011

By David Callahan
The opinions expressed are his own.

It’s a cruel fact for millions of unemployed Americans that the jobs plan President Obama unveiled last night will never be fully enacted by Congress. What’s even crueler, though, is that the least effective elements of the plan have the best chance of passage. New direct federal spending, the most powerful form of stimulus, is widely considered DOA on Capitol Hill – while weaker tax cut options will get a real hearing.

That’s not how things would go if mainstream economists were calling the shots. Economics is not an exact science, but economists do have pretty good models to predict what “fiscal policy multipliers” will be most effective at stimulating growth and new hiring. Just last month, for example, the chief economist for Moody’s Analytics Mark Zandi released an analysis of stimulus measures work. Zandi advised John McCain in 2008 and is anything but a committed liberal. But his study, supported by the full weight of Moody’s modeling expertise, clearly shows that spending is the best form of stimulus.

The single most effective form of stimulus, the study found, are increased outlays for food stamps — which create $1.71 in economic activity for each dollar in federal spending. The other top two boosters are spending on unemployment benefits and infrastructure. Earlier studies, including by the Congressional Budget Office, have found largely the same thing.

Now, in case you didn’t notice, President Obama did not stand up last night and call for massive new spending on food stamps. While he did call for new infrastructure investments and again extending unemployment insurance, these were not the largest elements of his plan. Instead, the biggest ticket item by far – estimated to cost $244 billion – is an expanded payroll tax holiday for both workers and employers.

The only reason Obama is putting so many eggs in this basket is that a payroll tax cut is said to have a fighting chance in Congress, given that Republicans backed a holiday last year. But make no mistake: the appeal here is political, not analytical.

According to the Moody’s study, each dollar lost by the Treasury due to a payroll tax cut to workers will create $1.27 in new economic activity and the cuts for employers will create just $1.05 in activity.

So, to translate, Republicans in Congress – the same crew that frets loudly about deficits – are only open to stimulus measures that deliver less bang for the buck than other readily available options. And it gets worse. The part of Obama’s plan that excites the GOP most is his call to lower the corporate income tax. Yet according to Moody’s, such a tax cut would create a mere $.32 of economic activity for each dollar spent – five times less than expanding food stamps. That’s not exactly a bargain for a strapped federal government.

Of course, you don’t need complex models to grasp that money given to those Americans with the thinnest wallets is most likely to get immediately spent. This is plain common sense. What doesn’t track with reality is that the economy would get a kick from giving yet more money to corporations that are already sitting on over $2 trillion in cash thanks to record profits.

Republicans are not the only folks in Washington who put ideology ahead of economic logic. Most Democrats are now too centrist to even mention the most effective way to get Americans back to work and stimulate growth – which is direct public jobs programs. In a recent study for Demos, the economist Philip Harvey modeled the effects of spending $100 billion on direct job creation versus unemployment benefits and food stamps. He found that the funds spent on job creation would produce 1,519,000 jobs overall — 1,075,000 created immediately by government and 444,000 created over two years through in-direct stimulus effects. In contrast, such spending on food stamps and UI would create 568,000 jobs.

Economists don’t have all the answers and we now know that their models failed to predict the severity of the Great Recession back in early 2009. But economics, the hardest of the social sciences, surely offers a better road map out of this current mess than the ideological paradigms that hold sway in Washington.

What’s especially ironic is that the Republican Party, which long positioned itself as the champion of hardnosed economic truths, is now so ready to dismiss these truths. Until that changes, fixing the economy will be an uphill battle.

Comments
13 comments so far | RSS Comments RSS

Based on my calculations, the models show that each job created costs $65K if you include the stimulus effect (or $93K for only the immediate jobs). Since the duration of the jobs is not listed, who knows if this is a good investment? A better way may be to give 2 million random Americans the average US salary of $50K (which costs $100B also). Additionally, if food stamps have an economic multiplier of $1.72/$1 but creates only 37% of that “direct job creation” would produce, the economic multiplier for “direction job creation” must be above $3/$1 invested. Does this match Moody’s/Zandi’s model?

Posted by Analytical | Report as abusive
 

I called my television dish and got somebody in the Philippines.

I Called HP & got customers service from Costa Rica.

I called a major Credit Card company and talked to someone in India.

All those jobs, and they r thousands of them, could be better done by American Citizens and Legal Residents in the US, earning US $ and spending, paying taxes in the US.

Tax outsourcing.

Posted by robb1 | Report as abusive
 

“a better road map out of this current mess than the ideological paradigms”. my read is that the republican party is no longer willing to lurch from one current mess to the next and prefers what they view as a long term “ideological paradigm” that will eventually stop the messes. good or bad it’s a legitimate opinion although quite hard nosed. i believe they have less interest in cleaning up yet another short term mess than in putting the house in order for the next generation.

Posted by bigturkey | Report as abusive
 

Increasing outlay on food stamps is the best way to create jobs!!!! if that was true, then all that the government needed to do was to distribute $10000 to every guy in the country…

the author should consider all the consequences of a policy and not just promote it blindly…

Posted by kp12 | Report as abusive
 

think about using food stamp subsidizing to stimulate the economy?–live in my neighborhood in the Bronx, get on a food line and wen you check out open your wallet–before you eh 10 people on the line had food stamps–something like m ore than $40% of the people in the B Bronx are on food stamps–only way it works is for some people like me to open our wallets

Posted by ilaboo | Report as abusive
 

The Republicans need to own their failure(s).

Posted by DLTooley | Report as abusive
 

Perhaps everyone is ignoring the most obvious truth about employment. In a world of mass merchandised identity, in a country without titles or very ancient pedigrees, being the man or woman with a job has enormous snob appeal. Government employees get more respect during recessions/depressions.

A country with imperial pretensions is going to want to raise a class of imperial pretenders. They may have to rank themselves as they always try to do, by class and occupation, because people are hopeless snobs. They can be near idiots and still be snobs. The advertising business knows that it can market snobbery to fools and it always works. But the trick is do t market snobbery that doesn’t look like the old snobbery. Everyone gets immune to that fairly quickly. .

The Obama jobs package is very selective job creation. I suspect none of those in Washington, of either party, really want broad based job creation because that implies a lack of social control and the prospect of inflation.

Obama is proposing the new PC employment package for those with the goods who have every intention of making sure they keep it and damned sure few others can ever join them.

An honest president – and less of a social climber (he’s already got a lifetime retirement income – what more does he want?) would push higher taxes because the more exclusively employed are still just as disposable as the products they make and the profits they fully intend to keep. And he would make certain that more of us “on foodstamps” were employed and paying taxes with them.

But foodstamps are better than starving or going homeless even if they are somewhat humiliating. But I know some well-educated people who are on them too.

People never stop loving money and those who have lots of it. Haven’t you noticed? It’s about the only thing that really insures a kind of difference between them – or at least the illusion of difference.

Posted by paintcan | Report as abusive
 

The Social Security system will be going broke in a couple of decades and the president is putting forth a program that will reduce it’s main source of funds, i.e. payroll taxes (the other source is interest from federal debt.) Where is the AARP branch of the Democratic Party? Perhaps the cost of the government regulating every aspect of our lives is a luxury we can no longer afford. (particularly when the ‘well connected’ can exempt themselves from enforcement leaving the ‘little guy’ who cannot afford lobbyists & overpaid lawyers).

Posted by wfclyon | Report as abusive
 

The same Mark Zandi who predicted in 2008 that the Bush stimulus ($150B) would add 1.5% points to GDP, lower unemployment by 0.5 points, and add 700K jobs by mid-2009.

http://www.economy.com/dismal/article_fr ee.asp?cid=102598

The same Mark Zandi who predicted in 2009 with the first Obama stimulus ($825B) “that GDP returns to its prerecession peak by the end of 2010—reasonable goals.”, peak unemployment at 9.01%, lower the unemployment rate to 7.84% this year (2011) and 5.85% next year (2012) and add 4M jobs by the end of 2010.

http://www.economy.com/mark-zandi/docume nts/Economic_Stimulus_House_Plan…

The same Mark Zandi who now predicts that Obama’s newest stimulus ($450B) will add 2% to GDP, and add 1.9 million jobs and cut unemployment by 1%.

The same Mark Zandi? The very same?

Really? What are the odds that Mark can be wrong three times in a row?

Posted by nxd | Report as abusive
 

The same Mark Zandi who predicted in 2008 that the Bush stimulus ($150B) would add 1.5% points to GDP, lower unemployment by 0.5 points, and add 700K jobs by mid-2009.

http://www.economy.com/dismal/article_fr ee.asp?cid=102598

The same Mark Zandi who predicted in 2009 with the first Obama stimulus ($825B) “that GDP returns to its prerecession peak by the end of 2010—reasonable goals.”, peak unemployment at 9.01%, lower the unemployment rate to 7.84% this year (2011) and 5.85% next year (2012) and add 4M jobs by the end of 2010.

http://www.economy.com/mark-zandi/docume nts/Economic_Stimulus_House_Plan…

The same Mark Zandi who now predicts that Obama’s newest stimulus ($450B) will add 2% to GDP, and add 1.9 million jobs and cut unemployment by 1%.

The same Mark Zandi? The very same?

Really? What are the odds that Mark can be wrong three times in a row?

Posted by nxd | Report as abusive
 

Enough of the Keynesian fantasy already. Let’s call it like it is.

http://www.economicpolicyjournal.com/201 1/09/greatest-economic-apologist-for-big .html

Reuters staff need not feel obligated to apologize to their readers, though the shame they feel for being dupes may eventually drive them to soul-search.

Posted by DPA71726 | Report as abusive
 

I doubt that the spending multiplier study was done to take into account a long time horizon.

Transportation infrastructure spending is often a black hole (see: Big Dig!), and is getting less and less relevant with advances in technology enabling real-time face-to-face communication via satellite or cable.

Posted by agamemnus | Report as abusive
 

“robb1:
I called my television dish and got somebody in the Philippines.

I Called HP & got customers service from Costa Rica.

I called a major Credit Card company and talked to someone in India.

All those jobs, and they r thousands of them, could be better done by American Citizens and Legal Residents in the US, earning US $ and spending, paying taxes in the US.

Tax outsourcing.”

Have you ever considered the Unions have jacked the cost of wages to astronomical amounts and the Americans want more and more to do less and even less. I am an American working in Dubai. They have every nationalitie in the world working here and the nationals from India, Philippines, Pakistan and Sri lanka work for about $100 per week and most work 12 hour days. Please tell me how companies can afford to pay the Americans they amounts they demand without jacking up the costs? Until Americans lower their expectations on salary jobs will continue to be had abroad. Come join us, living in a foreign country sucks but I have a job!!!!!

Posted by lippido | Report as abusive
 

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