The President’s “Jobs” speech to a joint session of Congress on September 8 was notably forceful and, I am guessing, politically adroit. It may help to save at least one job—his own. But the question I want to address is, assuming that all his recommendations were enacted by Congress, would they do enough for the economy to justify their estimated (doubtless underestimated) cost of almost $450 billion?
The principal recommendations and their estimated cost are as follows: cut in payroll taxes, both the share paid for by the employee and the share paid for by the employer ($240 billion); extension of unemployment benefits ($49 billion); subsidies for construction and related projects (highways, airports, school renovation, low-interest loans for private projects (“infrastructure bank”)) ($90 billion); aid to state and local governments ($35 billion); financial assistance to homeowners to refinance their mortgages ($15 billion); tax credits for employers who hire persons who have been unemployed for at least six months ($8 billion). The aim would be to spend most of the $450 billion between now and the end of 2012. The cost would be recouped by a combination of unspecified spending cuts and unspecified tax increases for upper-income taxpayers—but not immediately, since the aim is to inject money into the depressed economy in order to increase private spending in the hope that this will stimulate production and so employment, in a virtuous circle. So initially the cost of the jobds program would be defrayed by the Treasury with borrowed money, and thus would add to the national debt except insofar as the program caused an immediate rise in incomes and hence in federal tax collections.
I can set to one side three of the components of the program: extension of unemployment benefits, tax credits for employers who hire the unemployed, and financial assistance in refinancing home mortgages—the estimated cost of these three programs is $72 billion. They are losers. Extending unemployment benefits, while it will increase the income of the recipients, and in that respect have an effect similar that a tax credit or refund could be expected to have on people who pay income taxes, will actually reduce the hiring of the unemployed by reducing the cost to them of remaining unemployed; generally, the intensity of job search by unemployed persons surges when unemployment benefits are about to run out, and that date will be postponed for the recipient of the extended benefits.
Tax credits for hiring the unemployed are likely to have no net effect on unemployment at all, because there is no labor shortage. Employers have all the employees they want to have, which is why there is such a rate of un- and underemployment and discouraged workers; employers lured by the tax credit to hire an unemployed worker are likely to lay off one of their existing employees to make room for the new employee. And finally, financial assistance in refinancing home mortgages has been tried, and is a proven failure because of restrictions in mortgage instruments on refinancing and the poor credit of the homeowners who need refinancing the most.
What is left in the jobs bill are the payroll tax cuts, the financial assistance to state and local government, and the construction subsidies.
Whether the cut is in the employee’s share of the payroll tax, in the employer’s share, or (as in Obama’s proposal) in both, is of no economic consequence. Payroll taxes are a labor cost to the employer in either event; he either pays the government directly, or he pays a higher wage because the employee’s share of the payroll tax makes the employee’s net wage lower than it would be if the tax were lower. Reducing labor costs should increase the demand for labor, but probably not when the reduction is temporary, as it is likely to be. Reducing labor costs makes labor cheaper relative to capital as an input into production, but a company is unlikely to change the labor-capital proportions in its mode of production in response to a short-term fall in labor costs. Nor will he hire more workers just because they will settle for a lower pre-tax wage, if he has all the workers he needs. Still, presumably the benefits of the payroll tax reduction will be divided between workers and business in some proportion and the result should be some increase in consumer spending and business investment, but it may be small, as the tendency of business and consumers alike is to save rather than spend a high proportion of transitory (windfall) income. This tendency is likely to be especially pronounced at present, because the collapse of the housing bubble and the accompanying fall in stock prices increased the amount of debt in family budgets and thus spurred an increase in the savings rate.
The effect on stimulus of the save/spend division is exacerbated in the case of the financial assistance to the states and local governments. They have been busy laying off workers in response to mounting deficits in state and local government government, but it doesn’t follow that they will use the $35 billion that President Obama wants to give them to hire back these workers, rather than, for example, pay down debt, which have no, or very little, immediate effect on consumption or business spending.
That leaves construction. The $90 billion earmarked for construction projects is the most promising part of the Obama plan. Unemployment in construction and related trades is very high, and when the government finances construction projects the contractors have to go out and hire workers to do the projects; the effect on employment is immediate, and a fall in unemployment both boosts incomes and consumption and creates greater optimism about economic prospects. Increased consumption, and increased confidence about the future, have positive psychological effects on the propensity of consumers and businessmen to consumer and invest, respectively. This is an essential insight of Keynes: uncertainty about the future tends to make consumers and businessmen alike freeze; in his famous phrase it dampens people’s “animal spirits.”
The problem with government-financed construction projects as a method of stimulating employment and the good things that come with higher employment is delay, which we saw with the original (February 2009) $787 billion stimulus program, a significant portion of which was earmarked for construction and related projects. Modern American government is smothered in red tape, and the result was long delay in beginning the projects. The danger of such delay is that the public spending will be deferred to a future period in which the economy is growing, in which event the public projects will be competing for capital with private ones, in which event interest rates will rise, which will slow down the recovery.
Belatedly the Administration has recognized the problem: the President promised in his speech to cut the red tape that might impede the projects he wishes to finance. Good luck! The Administration is not noted for good management. Putting Vice President Biden in charge of the original stimulus program, rather than an experienced manager, was a serious mistake, but perhaps the Administration has learned from its mistakes and really will cut the red tape that might otherwise smother the most promising part of the President’s new program.