The jobs proposal ignores economics
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.