The ideas President Barack Obama is considering for his new jobs agenda could put hundreds of thousands of people back to work, and still have a limited impact in an economy that remains 6.8 million jobs behind its pre-recession peak, economists said.
Among the options Obama is considering is a version of a tax credit for new hires that could spur the creation of 900,000 additional jobs at a cost of $30 billion, according to an estimate by Michael Greenstone, an economics professor at the Massachusetts Institute of Technology and former chief economist for Obama’s Council of Economic Advisers.
“It allows the private sector to lead the economy toward the areas where the payoffs are greatest,” Greenstone said.
In discussions with the president, Obama’s economic team has strongly backed a tax incentive for new hires, said a person familiar with the deliberations.
Even so, the president’s capacity to dramatically improve the economy is limited after an $830 billion fiscal stimulus and almost three years of accommodative monetary policy from the Federal Reserve. Obama also confronts political constraints from Republicans in Congress opposed to further federal spending.
“The broad honest answer is that there’s a limited amount that he can do that I know of,” said Martin Neil Baily, a former chairman of the Council of Economic Advisers under President Bill Clinton. “We’ve kind of done a lot of the things we know how to do.”
The White House is considering more infrastructure spending, tax incentives to spur hiring, a reduction in the employer portion of the payroll tax credit and changes to unemployment insurance to subsidize worker retraining for inclusion in a jobs plan Obama is to announce next week, said a person familiar with the discussions.
Obama said at a White House ceremony yesterday he will use the moment to lay out proposals “to put more money in the pockets of working families and middle-class families, to make it easier for small businesses to hire people, to put construction crews to work rebuilding our nation’s roads and railways and airports and all the other measures that can help to grow this economy.”
Obama has spent much of the year pressing Congress to act on a familiar set of plans: renewal of a two-percentage-point cut in the employee-paid portion of the payroll tax and extended unemployment benefits, which are both scheduled to expire on Dec. 31; establishment of an infrastructure bank to fund public works spending; ratification of free-trade deals; and overhauling patent law. Obama has said those also will remain priorities.
More than two years after the recession’s official end, the jobless rate held at 9.1 percent in July, just one percentage point below its 10.1 percent peak in October 2009. Concern about the economy has increased in recent months as growth weakened during the first half of the year to its slowest pace of the recovery and financial markets turned tumultuous amid worries about the European debt crisis.
Federal Reserve Chairman Ben S. Bernanke said last week at the central bank’s annual Jackson Hole, Wyoming, symposium that U.S. growth “has, for the most part, been at rates insufficient to achieve sustained reductions in unemployment.”
Joel Prakken, senior managing director of Macroeconomic Advisers LLC in St. Louis, said he doesn’t “have high hopes — really any hopes” of a significant boost to economic growth from Obama’s new jobs agenda.
Weak Private Sector
“We just don’t think that can make up for the fact that in the private sector demand is so weak right now,” said Prakken, who published an Aug. 24 analysis of Obama’s options based on media reports of items under consideration.
Still, Greenstone said, “The right test is not whether they will solve the overall unemployment crisis but whether they will improve the lives of hundreds of thousands of families, and these programs can do that.”
A $5,000 tax credit for new hires combined with a five- percentage-point reduction in payroll taxes on the net increase wages paid by a business would stimulate 900,000 additional new jobs, according to his analysis. The tax break would also wind up subsidizing about 5.1 million new hires that Greenstone forecasts will occur without the incentives. Consequently, the cost per additional job would be about $35,000 apiece, he said.
The White House hasn’t disclosed how a tax incentive for new hires would be structured, and its impact and cost would depend on details such as the amount of a credit.
While government-funded infrastructure spending would directly add jobs and boost overall economic growth, public works programs take time to ramp up and so would their impact on hiring, Prakken said. Even though Obama’s 2009 economic stimulus concentrated on “shovel-ready” projects, it was criticized for delays in getting people back to work.
Prakken estimates a $50 billion public construction program could only complete about $7.5 billion in work the first year. He estimates that would create 75,000 jobs in the first year and peak employment of about 125,000 in the second and third years. That is about the same as the average monthly growth in payrolls so far this year.
Jared Bernstein, Vice President Joe Biden’s former chief economic adviser and now a fellow at the Center for Budget and Policy Priorities, said a public works program targeted at refurbishing dilapidated schools could have greater immediate impact.
Bernstein said low-income school districts have a deep backlog of repairs needed. Work such as roof repairs, insulation, weatherization and window replacement require more workers than most infrastructure spending, he added.
He estimates $50 billion spent on school renovations could create 500,000 jobs within 12 to 24 months.
John Makin, an economist at the American Enterprise Institute, a Washington policy research group that supports low taxes and market-driven policies, said he doubted any of the measures would lead to a sustained improvement in employment.
“These short-term stimulus measures haven’t been working,” Makin said. “When you take them away, growth goes back down again.”