What Should Be In A Jobs Bill? (A Job Insurance Supplement)

In Budget Politics, Economic Planning, Economics, Financial Crisis, Full Employment, History and Politics, Living Wage, New Deal, Politics of Policy, Poverty, Public Policy, Public Sector, Public Works, Social Democracy, Social Policy, Welfare State, WPA, Youth Policy on November 13, 2009 at 10:48 pm


Up until a week ago, the prospects for a second round of economic stimulus looked bleak; an ominous coalition of Senate moderates (the same folks who shrank the stimulus and cut out Pelosi’s teacher preservation program, and who’ve tried their level best to stop the health care reform effort in its tracks) threatened to force the U.S government into default unless Congress agreed to a deficit-reduction committee with authority over Social Security and Medicare, and President Obama responded by talking up deficit reduction in his next budget.

And then the October jobs report came out, showing unemployment rising over the magical 10% level that signals political disaster in a midterm election. Suddenly, President Obama began to talk up a December “jobs summit,” and Senator Reid announced that he’s pulling together a pre-election jobs bill.

This sudden momentum is welcome, but if we want to significantly reduce unemployment, and thereby protect our Democratic Congress at the same time, we need to be very careful about what goes into this jobs bill.

Evaluating Options:

To begin with, let’s start by analyzing the policy options that have been widely discussed in the media – a new jobs tax credit for employers, a payroll tax holiday, and a package of infrastructure public works projects.

New Jobs Tax Credit: one of the elements that the Obama administration has repeatedly mentioned, which was initially proposed but eliminated from the stimulus bill back in January, is a tax credit of $3,000 per new worker hired. Economists tend to be rather skeptical of such tax breaks: given that the average total compensation per worker is about $50,000 a year, they argue, $3,000 is unlikely to make much of a difference in hiring decisions.

The historical evidence suggests more of a mixed bag. During the Nixon Administration, a New Jobs Tax Credit was established, providing a 50% subsidy on the first $10,000 in wages (or about $5,000 per head). Taking the average of three different studies’ estimates, the New Jobs Tax Credit created about 468,000 jobs, at a cost of $6,480-$58,000 per job (in 2008 dollars).

While this suggests that a new jobs credit could conceivably create some jobs, given that the current proposal is quite a bit less, we might only see 280,000 jobs for $840 million. While that isn’t bad on a per-dollar basis, it’s still only a .18% drop in the bucket – not even enough to bring us down to 10% even.

(Note: to be completely fair, I should note that Timothy Bartik and John Bishop of the Economic Policy Institute, who have more expertise in these kinds of calculations than I do, estimate that a properly-designed New Job Tax Credit of 10-15% could create 2.8 million jobs in the first year, at a gross cost of $80 billion (net cost of $27 billion. This would give us an unemployment rate of 8.1%, which is pretty good for $27 billion.)

Payroll Tax Holiday: one idea that has an unusual amount of bi-partisan support from progressive economists like L. Randall Wray and conservative anti-taxers is a payroll tax holiday for employers. The strange thing about it is that, when you think about what it does, a payroll tax holiday only differs from Obama’s new jobs credit in terms of scale, not kind, coming out to a $2,500 credit for employers and a $2,500 credit for employees.

This comes out roughly equivalent in scale to the New Jobs Tax Credit of the 1970s, suggesting a potential direct effect of somewhere around 468,000 jobs, which is good, but would only drop the unemployment rate from 10.2% to 9.87%. On the other hand, as Wray and others have pointed out, a payroll tax credit – since it also results in increased take-home pay for workers – would provide additional stimulus of about $685 billion, which might increase the overall effect (if we take the stimulus’ 3.3 million for $787 billion) to 3.339 million jobs. This would bring unemployment down to 8%, which is a significant improvement. (Note: the Center for Budget and Policy priorities is rather more skeptical of the idea.)

The downside of the payroll tax holiday is twofold: first, politically, a $685 billion price tag would be extremely hard to swallow, even in the context of 10% unemployment. Second, there is the issue of timing. As we have seen, the stimulus has shown significant results in terms of turning economic growth around and at least stemming layoffs – but it’s taken 8-9 months, and we still haven’t gotten to the point of substantial jobs growth. It is unlikely that the electorate would see enough in the way of results before November to make this effort worth the political effort.

Public Works/ Stimulus:

Another option that has been discussed, especially since the stimulus package only ended up containing about $275 billion in public works (another $288 billion went to tax cuts and $224 billion to entitlement programs like UI and Food Stamps), is a second round of stimulus. Ideas for said stimulus have been varied – Lawrence Mishel and Ross Eisenbray have recommended $160 billion in aid to the states and another $10 billion in school repair and maintenance, L. Randall Wray has called for $400 billion split between Unemployment Insurance and aid to states, others have called for more money for a “smart” energy grid and other green projects, and so on.

What we have learned from the current stimulus is that your bog-standard Keynesian stimulus does work. Despite being split into tax cuts, entitlements, and public works, and despite the fact that only 58% of moneys have been awarded, and only 13% received (according to recovery.org), we’ve still created or saved 685,000 jobs and created about 2.3% in additional GDP growth. At this rate, we’re on track to hit 3.3 million jobs created or saved overall, which should mean an additional 2.7 million jobs once the public works contracts are fully let and the crews are hired. However, what we have learned is that it takes time. We very likely won’t see the stimulus take its full effect for at least a year.

A new stimulus package would undoubtedly have a significant economic impact; what is more doubtful is how quickly traditional public works and/or stimulus could take effect.

Direct Job Creation:

As I have discussed in my Job Insurance series, the direct creation of jobs is a potentially powerful vehicle for creating a large number of jobs for a relatively low amount of money (compared to traditional aggregate stimulus) quickly.

A youth jobs program, as discussed here, could create jobs at about $22 billion for every million jobs created. An adult jobs program, that seeks to provide a wage that could keep a family of four out of poverty, could create jobs at the rate of about $35 billion per million jobs created. The direct job creation route has certain advantages over the options discussed before: unlike a new jobs tax cut or a payroll tax holiday, direct job creation does not depend on the uncertain reaction of employers in what is a very dicey market. As we have seen, despite the marked improvement in terms of economic growth, employers have been rather hesitant to add employees, and have turned instead to getting more out of their existing workforce – even as average hours worked per week has dropped to about 32, output per hour has risen by 9.7% in the third quarter of 2009. Secondly, direct job creation can be extremely fast (in part because it doesn’t have to wait for the effects of stimulus to percolate throughout the economy) – the Civil Works Administration in 1933 was able to put 4.27 million people to work in three months. A direct jobs creation program would produce visible results well in advance of the 2010 midterm elections.

One of the most positive signs that I have seen recently is that the idea of direct job creation, which wasn’t even mentioned during the stimulus debates, has started to make its way back into the discourse. Both Mishel and Eisenbray call for a “public service employment” program (i.e, a jobs program where workers are tasked to providing public services instead of constructing public goods) of at least $40 billion. It’ somewhat hard to calculate how many jobs that works out to (given that Mishel and Eisenbray call for such jobs to pay the prevailing wage, which varies from state to state), but if we take an extremely rough estimate of $15 an hour, that would come out to at least a million jobs per $40 billion.

Getting Where We Need to Go:

So the question is, how do we build a jobs bill from this range of options? The trick here is to balance our objective of making a significant and fast dent in our U3 unemployment rate of 10.2% and our political constraints here regarding the budget deficit.

Wray and the other progressive economists, as is the wise political move, are arguing for the largest possible package, to push the “Overton window” of this debate as far as it will go, which is why Wray is calling for $400 billion just in aid to the states, and Mishel/Eisenbray call for a package to roughly works out to $293 billion (including $160 billion in aid to states, $40 billion in direct job creation, $80 billion for a new jobs credit, and $13 billion for school repair/maintenance). My guess would be that at the very most, we’re talking about anywhere from $100-300 billion. I certainly don’t think anything larger than that will fly at the moment. Granted, this effort becomes much easier if the jobs bill can be made to be deficit-neutral by raising some revenue. Mishel and Eisenbray’s suggestion for a Tobin tax to generate about $100-150 billion a year is a good one, allowing potentially a quite strong package to be funded without much difficulty.

Taking Mishel/Eisenbray’s $293 billion package as a rough guideline, I think we could create a package that created 8.8 million jobs if we combined a strong direct jobs creation package of 2.25 million jobs for youth (price tag = $49.5 billion) and 3.75 million jobs for adults (price tag = $131.25 billion) with Bartik/Bishop’s version of the New Jobs Tax Credit (price tag = $80 billion), coming in at $281 billion. This would drop unemployment down to 4%, and it would do it well within a year, creating a drastic sea-change in both the larger economy and in the public eye.

Making the package deficit neutral isn’t particularly easy, but it is possible – the suggested Tobin Tax would make it deficit-neutral within 3 years; establishing the youth and adult jobs programs as social insurance would generate enough revenue to pay back the initial cost within 7 years. And as I’ll discuss in my next section, this is only scratching the surface of potential revenue mechanisms.


Back in January when the stimulus was being debated, a jobs bill was but one element among many, and the political winds favored tax cuts and traditional public works (and let’s not forget, a smaller package than initially proposed).

Now a jobs bill has become a matter of political survival. And this is by no means a bad thing. Because it is when politicians most fear defeat that their traditional fear of the new and the untried becomes weakest. We should take advantage of this sudden change in the winds; it might not come again.


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