REACTIONS TO OBAMA’S JOB PLAN

Here’s MacroAdvisers’ take on the American Jobs Act:

We estimate that the American Jobs Act (AJA), if enacted, would give a significant boost to GDP and employment over the near-term.

  • The various tax cuts aimed at raising workers’ after-tax income and encouraging hiring and investing, combined with the spending increases aimed at maintaining state & local employment and funding infrastructure modernization, would:
    • Boost the level of GDP by 1.3% by the end of 2012, and by 0.2% by the end of 2013.
    • Raise nonfarm establishment employment by 1.3 million by the end of 2012 and 0.8 million by the end of 2013, relative to the baseline.
  • The program works directly to raise employment through tax incentives and support to state & local governments for increasing hiring; it works indirectly through the positive boost to aggregate demand (and hence hiring) stimulated by the direct spending and the increase in household income resulting from lower employee payroll taxes and increased employment.

Because the package is some $100-$150 billion larger than the proposal widely reported in the press and that we wrote about two weeks ago, these effects are expected to be significantly larger than previously expected.

This simulation did not incorporate potential incentive effects on employment from the payroll tax credit for new hires.

  • Studies have found that such credits do incent increased hiring. 
  • However, it is difficult to know the employment base of the firms eligible to receive the credit, hence we could not form an estimate of the aggregate employment gain 
  • That we did not allow for these effects suggests some upside risks to these employment estimates presented here.

Because these initiatives are planned to expire by the end of 2012 — except for the infrastructure spending, which has a longer tail — the GDP and employment effects are expected to be temporary.

  • That is, these proposals will pull forward increases in GDP and employment, not permanently raise their level.
  • Nevertheless, there may be good reasons to want to implement such programs today, if the government can follow through on the commitment to trim deficits later:
    • There remains considerable slack in the economy and nearly all forecasts anticipate only a gradual decline in the unemployment rate over the next couple of years.
    • Given the elevated risk of recession the U.S. faces today, additional near-term stimulus reduces that risk.
    • Given the deleterious effects of long-term unemployment on an individual’s skills and long-term employment prospects, speeding a return to employment is both individually and socially beneficial.
    • With monetary policy’s limited room to lower rates and stimulate demand, there is a role for counter-cyclical fiscal policy.

The NYT:

(…) The president’s program was only a start, and it was vague on several important elements, notably a direct path to mortgage relief for troubled borrowers. And some of the tax cuts for employers may prove ineffective. Nonetheless, at $447 billion, the plan is large enough to potentially lower the unemployment rate and broad enough to be a significant stimulus.(…)

At the core of his plan are two cuts in the payroll tax — one for employers and one for employees — that have long been embraced by Republicans. The employee cut would reduce the tax to 3.1 percent of income instead of the 4.2 percent negotiated last year. (It was 6.2 percent originally.) Although it could have been better targeted to low- and middle-income families, it will put money in people’s pockets quickly and increase consumer demand.

For employers, the plan would halve the payroll tax for most small and medium-size businesses and would provide an incentive for hiring by temporarily removing the tax for new employees (and on raises for existing ones). Companies would also get a $4,000 tax credit for hiring anyone out of work for more than six months. Unemployment insurance would be extended for five million people. Though Mr. Obama said more Americans would be able to refinance their homes at low interest rates, he did not say how.

The plan would provide $35 billion in state aid to prevent up to 280,000 teacher layoffs while hiring tens of thousands more, along with additional police officers and firefighters. It would create jobs to modernize 35,000 schools across the country. And it would accelerate $50 billion in improvements for highways, railroads, transit and aviation.(…)

Though the plan would be paid for by more deficit reduction, he left those vital details until later. It was gratifying to hear him call for higher taxes on corporations and the wealthy, but his warning of cuts to Medicare and Medicaid — lifelines to the most vulnerable — raised concerns about trading one important program for another.(…)

The WSJ:

If President Obama’s economic policies have had a signature flaw, it is the conceit that by pulling this or that policy lever, by spending more on this program or cutting that tax for a year, Washington can manipulate the $15 trillion U.S. economy to grow. With his speech last night to Congress, the President is giving that strategy one more government try. (…)

But what happens in 2013 when those tax rates expire and Mr. Obama pledges to hit thousands of those same small businesses with higher tax rates on income, capital gains and dividends? He seems to think businesses operate only in the present and will ignore the tax burdens coming at them down the road. This is the same reasoning that assumed that postponing ObamaCare’s tax and regulatory burdens until 2014 would have no effect on business hiring in the meantime. (…)

The unfortunate reality is that even if Republicans gave Mr. Obama everything he wanted, the impact on growth would be modest at best. Washington can most help the economy with serious spending restraint, permanent tax-rate cuts, regulatory relief and repeal of ObamaCare. What won’t help growth is more temporary, targeted political conjuring.

Paul Krugman:

(…) It calls for about $200 billion in new spending — much of it on things we need in any case, like school repair, transportation networks, and avoiding teacher layoffs — and $240 billion in tax cuts. That may sound like a lot, but it actually isn’t. The lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the U.S. economy, and this plan — which wouldn’t deliver all its benefits in the first year — would fill only part of that hole. And it’s unclear, in particular, how effective the tax cuts would be at boosting spending.

Still, the plan would be a lot better than nothing, and some of its measures, which are specifically aimed at providing incentives for hiring, might produce relatively a large employment bang for the buck. As I said, it’s much bolder and better than I expected. (…)

David Brooks:

Thursday night the president gave one of the most forceful and compelling domestic policy speeches of his presidency. His proposals were drawn from the middle of the ideological spectrum and were selected to appeal to people who don’t put a lot of faith in government spending. There’s a payroll tax cut, a small business tax cut, infrastructure spending, subsidies so states don’t have to lay off cops, firefighters and teachers, and a plan to use unemployment insurance to subsidize temporary work for the unemployed to get them back involved in the labor force.

Republicans have supported most of these ideas at one time or another. Still, let’s not sugarcoat things. Recent stimulus packages have not exactly lived up to the hype. Temporary tax cuts generally don’t lead to much job creation. Given the long lead times involved, infrastructure spending is an odd way to combat a double dip that might be starting right now. Job subsidies often go to companies that would have hired the people anyway. One recent study showed that a plurality of the people hired under the last stimulus package already had jobs; they were just switching from one to another.(…)

Personally, my bottom line is this: I think the president has earned a second date. He’s put together a moderate set of stimulus ideas. His plan may not be enough to jolt prosperity, but it might maintain its current slow growth.

If he comes up with his own deficit proposal that pays for his programs with some serious entitlement reforms (and not merely with some boilerplate “let’s tax the rich” plan), then Republicans would be wise to work with him to make his growth ideas more effective.(…)

Goldman Sachs:

The total cost of the plan has risen from the previously reported $300 billion (2% of GDP) to $447 billion (3% of GDP). At first glance it appears that, if enacted, around 75% (or roughly $335 billion) of the fiscal effects of the proposal would show up in calendar 2012. We estimate that fiscal restraint under current law would total $270 billion, or $160 billion net of the extension of the payroll tax cut (to 4.2%) we already assume in our forecast. Thus, if enacted in its entirety, this proposal could shift the fiscal impulse in 2012 from -1.1% of GDP to +0.4% of GDP. However, it is not yet clear how congressional Republicans will respond to the proposal, and we are not changing any of our estimates at this time.

The FT:

(…) Many of the steps he has outlined – extending the payroll tax cut and unemployment insurance coverage, for example – will only prevent existing legislation from lapsing. Tax credits to stimulate hiring have been tried in the past, and economists are divided over their effectiveness. Aid to state and local governments, an important ingredient of the 2009 stimulus, did temporarily stave off large cuts in public sector employment but had little long-term effect on the private economy. (…)

Finally, Mr Obama continues to rely on a diagnosis of America’s economic woes that misses the heart of the matter. If financial crises really are different from cyclical downturns – as economists Kenneth Rogoff and Carmen Reinhart have argued – then traditional demand-side policy responses are palliatives rather than cures. (So are the supply-side tax cuts at the heart of contemporary conservative economics.)

If the epicentre of the current stagnation is excessive household debt, which more than doubled as a share of household income between 1982 and 2007, then we face a choice: Either we wait for deleveraging to occur on its own – a slow, painful process that will take another five years – or we can work to accelerate it by attacking household debt at its core. That would mean pressing creditors for reductions in principal amounts as well as interest rates mortgage debtors must pay – a step the administration has thus far rejected.(…)

 

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