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.
It is hard to improve upon Posner's critique of the new Obama fig leaf masquerading as an economic stimulus proposal.
Posted by: TANSTAAFL | 09/11/2011 at 07:37 PM
Wait...is it just me or do these two arguments totally contradict each other:
"Extending unemployment benefits...will actually reduce the hiring of the unemployed by reducing...intensity of job search by unemployed persons"
and
"there is no labor shortage. Employers have all the employees they want to have"
It seems untenable to assert that it would be good to let unemployment benefits expire because it would cause people to more frantically search for jobs and then, in the next paragraph, claim that there are simply no jobs to be had even if we try to create incentives for companies to create more with tax breaks.
Posted by: contradiction much? | 09/11/2011 at 07:55 PM
It is worth mentioning that the Obama administration already tried to implement tax credits for the hiring of new or unemployed workers. It is a bad idea for reasons that Posner listed, and it was rejected by Congress even when it was still controlled by Obama's allies. The fact that it is being proposed yet again suggests that either the Obama administration has been slow to learn or that the proposal is merely a political ploy.
Posted by: Mitchell Khong | 09/11/2011 at 08:20 PM
No contradiction.
The number of unemployed is governed by labor demand.
The extent to which the hires are from the pool of long-term unemployed rather than recently unemployed or currently working depends in part on the search effort by the currently moderate-term unemployed.
-dk
Posted by: Dick King | 09/11/2011 at 08:30 PM
Sure, I will concede that side of the double bind--however that also means that you must concede that Posner's claim that unemployment benefits decrease intensity of job searching is then totally baseless in this context because no matter how hard the unemployed look for jobs, to quote Posner, "[e]mployers have all the employees they want to have."
Given that there are not enough jobs period, the insinuation that we should allow millions to drop of unemployment to set a fire under their pants is not only economically bankrupt but also reflects a total lack of empathy for the circumstances of the jobless.
Not only would extending unemployment benefits save millions of families from dire poverty, and thus be the ethical thing to do, it would put cash in the hands of people who will actually spend it (thus stimulating demands and growth).
Posted by: contradiction much? | 09/11/2011 at 08:32 PM
since there is little change the Republicans would ever do anything for the good of the country, or might in any way lead to Obama's re-election, Obama obviously framed his package for maximum political effect.
the plan has one great attribute---it brings into focus our FICA taxes were are both horribly regressive and anti-growth. A tax on a job, obviously, out to be eliminated.
The albatross around Obama's neck are all of his supporters who are so impractical they just don't get it. Observer has been reading Call Me Tom, the new Eagleton biography. Boy did Tom understand the shortcomings of today's liberals.
Obama should use this speech as a springboard to propose all kinds of changes and programs, starting with ending the income tax and replacing it with a VAT. Liberals will wring there hands about a VAT not being progressive, but the current tax code is regressive, especially as applied and we need lots more more, especially for basic research
see page 25 at this link
http://www.aaas.org/spp/rd/rdreport2012/12pch02.pdf
Posted by: an observer | 09/11/2011 at 08:55 PM
"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."
........ this has been the traditional (mebbe) wisdom in short recessionary dips that would fit the term "cyclical" but with the construction sector being close to decimated with NO chance of coming close to recent levels in our life time.... we should begin the construction stimulus, and continue it for the coming decade.
Posner is right about "red tape" as the first stim-projects had to both begin in a short time and be finished in 18 mos. Highway and other projects can be greatly delayed by bad winters, and need one mention having half the nation under water in the "good building months".
But there's more, it takes time for those idled by housing starts having dropped from 2.5 million to 350,000 to move from light residential crafts to heavier, infrastructure related projects. Even if the guy is trained, happens to have some of the right hand tools etc... there is still the delay as a company obtains a contract, moves into place and hires/trains the necessary help.
This is a DEEP mess, and will not respond to a quick "shot in the arm". The $90 - $135 if state aid is counted isn't much and should be continued until most of the estimated $2 trillion of long delayed repairs and upgrades are accomplished.
As for worrying about "helping when the economy is recovering" what is to worry? That these piddly amounts, or a roaring rebound is going to cause (haha!) labor shortages? Ha! enough to give those of median and lower incomes a chance to see some tiny bit of "trickle down?" We've enough labor on the side that coupled with predictable productivity gains if labor became (at all) in short supply to grow at 5% for the coming decade. Please wake me if inflation triggered by labor shortages rears its (ugly to some) head.
Posted by: Jack | 09/12/2011 at 03:10 AM
An unemployment problem in America? Imagine that! Once again, it is the common problem within American Government. To little, too late. This program should have been placed on the table twelve to twenty four months ago, if not earlier, not last week. It's going to take at least this long to get the program rolled out to Main Street (the Red Tape issue). The main problem as I see it, is that Washington, the Media, Finance, Commerce and Industry has suffered from a mistaken mindset, "It's only a Recession (the current economic blinders problem-Depressions are a thing of the past) and things will be back to normal in about twelve months. Oops, maybe we were wrong, this is going to be an extended Recession. Let's call it the Great Recession." Hey! Maybe this is a what a Depression looks like in a modern Global "Free Trade" Economy. Right ...! And once again we're back to "To little too late".
At least it's a step in the right direction. Someone's recognized the fact that the indvidual consumer can't and won't pull the Economy out of this Depression and that's it's going to require the massive support and action by not only the Government, but also Business and Industry.
Posted by: NEH | 09/12/2011 at 02:27 PM
"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."
I think that this is pretty accurate. It brings up the question as to why the president seems to think that government is always the answer to an issue. It seems to always be a question of what the government will try to fix with tax increases, incentives, etc. rather than IF the government should do anything at all.
Posted by: Matt | 09/12/2011 at 04:40 PM
Matt, "Why does the President think that government is always the answer to an issue?" Because he's the Head of the Government and answers to the people of the United States. When there is a problem, he is required to respond. That's why he was elected. Do you think that the Corporate Executives and Boards of Directors are going to respond to a Macroeconomic issue or problem? They are only concerned about their on little baliwicks and feathering their own little nests. Much like the Bank of America who is going to be laying off thirty thousand individuals in the next few months...
An employment problem in America, evidently not Corporate America's problem. Whose problem is it?
Posted by: NEH | 09/12/2011 at 07:07 PM
It seems that reducing labor costs would stimulate those employers who have excess capital and are ready to expand. And a hiring bonus for employers to hire the long-term unemployed break the vicious cycle where person unemployed for two years only becomes more unemployable without being able to rectify the situation.
Posted by: Jimbino | 09/12/2011 at 07:49 PM
A VAT on blog commentary advocating governmental economic stimulus as the solution would be a great source of tax revenue, but for the fact that such commentary adds no value.
Posted by: TANSTAAFL | 09/12/2011 at 08:39 PM
Do you think that the Corporate Executives and Boards of Directors are going to respond to a Macroeconomic issue or problem? They are only concerned about their on little baliwicks and feathering their own little nests. Much like the Bank of America who is going to be laying off thirty thousand individuals in the next few months...
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Posted by: Cheap Moncler Jackets | 09/13/2011 at 02:35 AM
NEH Exactly.. but economists know that government typically can not (will not) respond fast, or aggressively enough.
They're counting their beans and (haha!) "cuts" and "savings" over ten years but doing their macro in year or two dabs?
Matt; I don't expect miracles from the new hire bonuses either, but our very small businesses said to be the incubator of jobs often run on thin margins, so the bonus might tip the scale in favor of a hire. We have to be optimistic that the match will prove productive and continue....... a biggie in that person's life. A job is a lot better than no job. (Something as NEH touches on doesn't quite sink in for those in the DC area where joblessness is low)
And....... what really is the government risking? Is the bonus $2500? Perhaps less than ten week's unemployment costs? And other low income subsidies? If the job last three months its a win-win, eh?
Posted by: Jack | 09/14/2011 at 02:05 AM
I think this is a shame otherwise it is a brave decision.
Posted by: rowing machine benefits | 09/14/2011 at 01:06 PM
Geithner told CNBC this A.M. that he was a fiscal hawk. We now know that Obama is the same, by which I mean he is a tax and spend Democrat of the Old School, in contrast to the borrow and spend Republicans who dug the whole we are trying to escape.
Listening to Geithner his pitch was simple. The benefits are worth the costs.
Posted by: an observer | 09/14/2011 at 10:39 PM
Observer -- a few are now discussing our being a LOW tax nation. The fixes are, politically, confusing for the public (like lowering stated rates but closing loopholes) and DIFFICULT to fix as each loophole has the group that got it put in in the first place.
Gspn was asked about "tax expenditures" and interestingly testified that they should be Zero in theory. "A poor way........" Indeed! and HONEST capitalism would have FEW gifts from Congress, perhaps some for new tech, or to urge us to make a needed transition (as LOWERING our dependence on burning fossil fuels, but they should be a small percentage of the overall tax revenue policy.
Ha! as for "tax and spend" Geithner and others are bright enough to know it's not "we" who are bankrupt but that our government is not faced with the many sins of the past of the SPEND, SPEND and BORROW bigtime "conservatives".
Someone, perhaps all of us, got away with spending and running up the C-card now it has to stop or at least be slowed. "Trouble is" it's only those at the upper end of these graphs who have anything left with which to pay bills.
http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/
And! some of 'em profited greatly! War profiteers? Banksters and other WS thieves? CEO's who won't answer the alarm unless "compensated" at over 400 times what they pay those doing the work, job exporters like Romney. Wouldn't hurt a thing to roll back Bushy's "unaffordables" and then some.
Posted by: Jack | 09/15/2011 at 02:38 AM
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Posted by: yangxinle | 09/15/2011 at 04:09 AM
Facts:
take a look at this graph what conservatism has done to USA and about post 9/11 drop in jobs
http://www.washingtonpost.com/blogs/ezra-klein/post/the-jobs-crisis-began-in-2001/2011/08/25/gIQAMK3eSK_blog.html
Posted by: an observer | 09/15/2011 at 06:39 AM
450 billion?!?, I cannot even imagine this sum, but hope that the politicians spend money on the right purpose!
Posted by: Jina Van | 09/15/2011 at 07:49 AM
The "weirdness" continues in the Republican dominated House of Representatives... They just passed Legislation attempting to gut the National Labor Review Board. And we're still talking about the virtues and vices of "Tax and Spend Democrats" or "Cut Taxes and Spend Republicans". John Q. Public can expect much worse from this House in the days and Months to come. Is the working man and woman finally doomed in modern America?
Posted by: NEH | 09/15/2011 at 01:23 PM
Obama Admin is working hard to provide employment to citizen. So i will take it positively. Because they are trying. And that is what they can do.
Posted by: business phone services | 09/15/2011 at 08:14 PM
Jefferson (including his editors) said it best.
"He has refused his assent to laws, the most wholesome and necessary for the public good. . . .
He has erected a multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance. . . .
He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his assent to their acts of pretended legislation: . . .
For cutting off our trade with all parts of the world;
For imposing taxes on us without our consent; . . .
For taking away our charters, abolishing our most valuable laws, and altering fundamentally the forms of our governments; . . ."
Do Obama and his defenders not recognize, 235 years hence, that he is repeating the errors of George III?
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