JONATHAN COHN AUGUST 19, 2011
President Obama’s plan to give a major economic speech after Labor Day means that, finally, Washington is going to have a serious conversation about creating jobs. And it can't come a moment too soon. While Thursday's stock market decline shouldn’t alarm you, the conditions that sparked it should.
Of course, whether that conversation on jobs leads to action on jobs is more a question of politics than policy. Republicans want no part of anything with Obama’s name on it and, until that changes, very little can pass Congress.
Still, the best policy conversations start with what we should do, not with what we can (or can’t) do. And it’s not like we have to think too hard about ways of boosting growth: Infrastructure projects, direct aid to the states, assistance for the unemployed, and other familiar remedies should work just fine. As Josh Bivens of the Economic Policy Institute noted recently,
There are not many new and exciting policy levers that can be pulled by Congress and the president to solve today’s unemployment crisis. Fortunately, the old (and presumably boring) policy levers could reduce unemployment much more quickly if applied with enough force.
The key is finding the right mix of these ideas and getting the details right. With that in mind, here are three essential elements of a successful jobs agenda, based on conversations with a series of economists -- mostly center to left -- who can speak to this issue with way more authority than I can.
Size. This one can be said very simply. The jobs program should be big.
The most recent economic forecast from Mark Zandi, of Moody’s, suggests that gross domestic product will grow at an annualized rate of near 2 percent this year and 3 percent next year. That’s not good. That rate of growth will create roughly enough jobs to keep up with population growth, but no more. And that’s not enough when more than 9 percent of the country is out of work, not including those who have stopped looking altogether. The goal should be putting those people back to work, not merely absorbing the latest comers to the workforce.
So how much faster do we want the economy to grow? One of the economists I consulted was Harvard's Jeffrey Liebman, a former budget official in the Obama Administration. In his response, via e-mail, he started with Okun’s Law, a basic tenet of economics about the relationship between growth and unemployment:
Okun’s Law tells us that in order to reduce the unemployment rate by 1 percentage point, GDP needs to grow 2 percent faster than trend for a year. U.S. trend growth is around 2.5 percent. So we need real GDP to grow at 4.5 percent a year for two years to bring the unemployment rate below 7 percent. Achieving 4.5 percent growth for the next two years should be the goal of U.S. economic policy. It is hard to see this happening without additional fiscal stimulus of at least 2.5 percent of GDP in each year. What we need is a second stimulus bill as large as the Recovery Act, but this time the composition needs to be 100 percent stimulus. Ideally, this stimulus legislation would be paired with legislation resolving our medium-term deficit problem. Eliminating the uncertainty about how our fiscal imbalances will be corrected would raise confidence among economic actors and significantly increase the chance that we hit the 4.5 percent target for GDP growth.
What would that be in dollars? Over the next two years, GDP is projected to be between $15 and 16 trillion annually. Do the math, as Liebman suggests, and you're getting to the neighborhood of $400 billion a year, depending on whether you account for extensions of unemployment insurance and the payroll tax break already in effect. And it could easily be more if, say, the current economic projections turn out to be optimistic.
Liebman was from from the only economist talking in those terms. Even more conservative estimates I heard amounted to hefty sums, at least by the standards of today's fiscal debate. Here's Dartmouth’s Andrew Samwick, who was a presidential adviser during the early years of the Bush Administration, via e-mail:
It really depends on what you spend it on. If you are going to do things that are temporary and don't change people's long-term expectations, then you will need to pump in more money. If instead you do things like spend $250 billion a year for four years, and spend it on closing our public infrastructure gap, then households and businesses will likely make complementary investments -- because the public investments raise the returns to the private investments.
The point is not to get hung up on a specific number. The point is that whether it's $300 billion, $400 billion, or more, we're talking about a lot of money.
Speed: The economy needs help. And it needs help now.
That’s not necessarily an argument against measures with delayed impact. The sorry state of American infrastructure would call out for public investment even if the economy were growing rapidly. With interest rates as low as they are, it’s frankly stupid not to borrow money to build infrastructure. Besides, the way things are going, we’re going to need stimulus in 2012, and 2013, and maybe beyond.
But when it comes to putting people back to work right away, infrastructure programs, in particular, can be slow. The whole point of the infrastructure bank, for example, is to subject every proposal to rigorous cost-benefit analysis. That takes time. One way around this problem is to change some of the rules for public works – and, as Gary Burtless of Brookings explains, applying some lessons the federal government learned after the 1994 Northridge earthquake in Southern California:
The feds learned a bitter lesson from San Francisco’s very slow spending of federal aid dollars after the World Series earthquake a few years earlier. Wanting to avoid a repetition of that fiasco, the federal gov’t told CA and L.A. that the U.S. earthquake relief dollars had to be spent within a specified period. It worked. L.A. repaired its wrecked freeways much faster than the Bay area fixed its wrecked highways and bridges.
Another answer is to focus on programs that can get up to speed quickly. Jared Bernstein, who also served in the Obama Administration and now works at the Center on Budget and Policy Priorities, continues to talk up the “FAST” proposal that would finance a burst of school repair and renovation projects around the country. I continue to think that’s a good idea, particularly since it's labor intensive work and there's quite a lot of it to be done. It turns out we have many schools that need work -- a case of bad news being good news, at least if you’re trying to come up with policy ideas.
Of course, that also strengthens the case for other kinds of interventions that have quick effects. Extending unemployment insurance is one obvious policy initiative that satisfies this criteria, as Burtless points out:
Helping the long-term unemployed through direct transfers (unemployment benefits, generously subsidized health insurance) is sensible policy from the perspective of its anti-recession effects (the target population will spend the money faster than you or I) and from a humanitarian viewpoint.
It’s also a strong argument for direct assistance to local and state governments, which could use the cash immediately to plug budget holes – and stop laying off workers, the way they are doing now.
Smarts. Yes, I was trying for three “S”s, just to make this post a little more memorable. But it’s also a good principle. And I mean smart in the sense of fiscally smart.
Deficits aren’t a problem right now, notwithstanding what so many politicians and pundits have been saying. But they will be a problem in the future. That’s an argument for offsetting economic boosters with spending cuts and/or revenue increases in the future. Fortunately that is easy to do. All of the measures that are, or should be, under consideration would be temporary and relatively short-term. So it’s relatively easy paying those off over time.
But there’s another way to make these proposals smart: To make them expire when economic conditions improve. In an ideal world, extra unemployment insurance and aid to the states would act as truly “automatic” stabilizers, to borrow the economics lingo. In other words, they would start when the economy in bad shape and end when the economy has recovered, no longer requiring separate acts of Congress as each new emergency arises.
An easy way to do that is to link their duration explicitly to an economic indicator – and say, for example, that one or the other or both would end when unemployment declines below a reasonable threshold of 7 percent.
So there you have it. The ideal jobs package would inject hundreds of billions of dollars into the economy as quickly as possible – but in a way that paid for itself over the long run and, ideally, diminished automatically once a strong recovery is under way. The administration could do a portion of this on its own, whether by using Fannie Mae to help distressed homeowners or getting China to help U.S. exports by revaluing its currency. The Fed could obviously lend a hand, maybe a big hand, as well. But to meet these criteria, Congress would have to take some action.
Is there a chance Congress would do that? Not right now. Among the proposals circulating on Capitol Hill, the initiative from progressive House Democrats comes closest. Republicans, on the other hand, have very different ideas: They dismiss such proposals as "more failed stimulus." And they can block legislation, given that they control the House and have enough votes to mount filibusters in the Senate.
But given the alarming news about the economy and Obama's determination to press the issue this fall, there should be a chance to do something The closer it adheres to these principles, the better it will be.
Update: With a few edits and clarifications.