The Path to More Jobs and Growth

What amounts to a small miracle for Washington happened this week: The Congressional Budget Office (CBO) issued a new report on the effectiveness of different policy approaches for boosting growth and jobs.  The findings affirm basic economic logic – and support the policy ideas that we urged on the administration at the White House Jobs Summit and, before that, for months here.   As CBO figures it, the best way to boost employment, in jobs per-federal dollar, and the second best way to boost growth quickly, in dollars of new output per-federal dollar, is to cut the payroll taxes paid by employers who also increase their overall payrolls.  CBO calculates that this approach would be six to eight times more powerful in creating jobs than cutting personal income taxes, four times as potent as spending more on infrastructure, and twice as effective as new investment breaks for businesses or additional aid to the states. 

The reasons are obvious once you clear away the scenarios concocted by lobbyists for other approaches.  It’s virtually the only proposal that’s actually targeted directly at job creation, and it’s effective because it directly reduces a company’s cost to create new jobs.   Its’ projected power to boost GDP follows directly from its success in creating jobs, since the new workers would spend virtually everything they earn, boosting output in the goods and services they choose and the jobs required to provide those goods and services.  

CBO also found that the best way to spur growth quickly, again in new output per-federal dollar, and the second best way to boost employment, in jobs per-federal dollar, is to expand assistance to unemployed Americans.  This is as classic an exercise in Keynesianism as they come.  Jobless people can be counted on to spend everything extra they receive, boosting demand for lots of goods and services; and meeting their additional demand requires more workers, materials and goods.  It also has the virtue of directly doing something good for millions of people.  We’ve lost an astonishing 7.3 million jobs since this downturn began.  More than half of all Americans currently unemployed (counting those who’ve given up looking, in despair) have been out of work for at least a half-year.  For the rest of us, CBO found that it would boost growth and jobs, again, significantly more than infrastructure spending and many times more than income or business tax breaks. 

Alas, basic economic logic didn’t stop the Bush administration from focusing its stimulus tax policies on precisely the broad tax cuts that, as CBO now confirms, do little in a downturn for growth or jobs.  Sadly, the facts and logic also didn’t deter the current administration and Congress from giving away one-third of the 2009 stimulus package in this way, and considering more investment tax breaks as a part of a new jobs package.  

The CBO report also doesn’t mention that providing more jobless benefits and a year of payroll tax relief for employers won’t be nearly enough.  On our present path, the expansion just beginning to unfold won’t look or feel much like the 1990s, when job creation was strong and most people’s incomes rose smartly.   It’s much more likely to follow the course of the Bush expansion, when job creation was weak and most people’s incomes stagnated (or worse).    And by the way, don’t be distracted by a few months of strong economic data.  GDP growth will likely come in quite high for the fourth quarter of last year – we’ll know soon – because that’s when businesses began to replenish the inventories they’ve been drawing down since late 2007.  But inventory swings don’t translate into income gains or lasting jobs. 

The reason we’re on this path is that Washington still hasn’t done much about the problems that gave us such a disappointing expansion last time and the disastrous downturn that followed.   Even if health reform passes, it won’t include the strong medicine needed to reduce the squeeze on jobs and wages coming from employers’ skyrocketing health care costs.  There’s also precious little in the sheaf of education and workplace proposals now before Congress -- and they may not even get to them -- to expand an average worker’s access to the skills everyone will need in the next decade to operate in technology-intensive workplaces.   Nor are there any prospects left this year of passing energy reforms that could reduce our dependence on high-carbon energy imports, and consequently lessen our economic vulnerability to the swings in their international prices.  

Washington also has done so little to address the mortgage markets that brought on the broader financial crisis that home foreclosures will set new record levels again this year, creating another stumbling block for a strong expansion.   And the prospects for meaningful financial reforms to goad Wall Street into funding the American economy, instead of their latest round of high-risk security bets, seem to be nearly gone. 

After this week’s results in Massachusetts, can anyone seriously doubt that a majority of Americans are truly and finally fed up with Washington’s resistance to doing what makes economic sense?