JONATHAN COHN SEPTEMBER 8, 2011
A few weeks ago, when President Obama announced his intention to propose a major jobs bill, I asked a group of respected economists what, in an ideal world, such a bill would contain. They agreed on three basic criteria: Size, speed, and smarts. In other words, it would be big, it would be quick, and it would be self-sustaining in the long run.
The American Jobs Act may not be perfect. And, lord knows, it may not pass Congress in any recognizable form. But it appears to meet those three key criteria, or at least come reasonably close.
Size: The numbers I got from economists varied, but the rough consensus was that an investment in the neighborhood of $400 to $500 billion (including renewal of the existing payroll tax cut and unemployment insurance extension) would reduce unemployment by roughly a percentage point over the next year, relative to what it might otherwise be. If the current projections are right -- always a big if -- that'd still leave unemployment at close to 8 percent, which would be too high. But it'd be a whole lot better than 9 percent, which is where it's stuck now.
Would the American Jobs Act accomplish that? Well, it would give employers a payroll tax break worth $70 billion. It would give employees a payroll tax worth $175 billion. It would extend unemployment insurance and offer targeted assistance to the long-term unemployed, for a total of $62 billion. And, finally, it would spend money on road building, school repair, and the retention (and rehiring) of public employees -- to the tune of another $140 billion.
Add it up and you get close to $450 billion, very much in the ballpark of what those economists had recommended.
Speed: One problem with the Recovery Act was that it didn’t spend money quickly enough, partly (at least in some tellings) because it had so many safeguards against waste and graft. The American Jobs Bill is designed to move more quickly.
As you may notice from the above breakdown, tax cuts and extensions of unemployment insurance account for more than half of the total program. All of those would take effect in the first year. And the public works programs in the bill include several designed to get underway quickly, including a program of school repair and maintenance. (Yes, that means a version of the FAST initiative former administration economist Jared Bernstein has been promoting.)
Overall, according to one senior administration official, the Act would inject at least three-quarters of its money -- maybe more -- into the economy within the first year.
Smarts: Obama has indicated that he will demand that every dollar in new spending or tax cuts have offsets (i.e., spending cuts or tax hikes) in the future. We'll find out next week whether he's serious about that. My guess is that he is, which is great in principle but perhaps not so great in practice. I'm already cringing at the thought he'll propose, once again, to raise the eligibility age for Medicare.
But this proposal is smart in other ways, too. Take a closer look at the payroll tax proposal. One danger of a payroll tax cut is that already profitable companies will simply hold on to the extra money, rather than spending the money to hire new workers or increase pay for existing ones.
This payroll tax proposal seems less prone to that problem. It would give more than two-thirds of its benefits directly to employees – it’s money in their pockets. (They might use it to pay down debt, rather than spend. But, as Matt Yglesias notes, in this particular environment reducing personal debt probably has an unusually large stimulative effect.)
And the money to employers would cover only the first $5 million in payroll, which means it wouldn’t do much for large companies but would make a big difference for small ones. At least in theory, those small firms are more likely to be struggling now -- and put the money to immediate use.
Again, the plan is not perfect. I've pinged those same economists and, by the time I've heard back, I'm sure they'll have some criticisms. (I'll post them in updates.) But I also think they'll say the plan will make a significant impact on unemployment. That should count for something.
Update: I made a few tweaks, particularly in the end, to emphasize that the plan would reduce unemployment significantly -- but that'd there still be more work to be done. For some perspective on this, see Larry Mishel and Paul Krugman.