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September 19, 2011

The Efficacy of the American Jobs Act

In my professional judgment, President Obama’s proposed American Jobs Act strikes as fair an attempt at stimulating the economy as is now possible. Whether or not it is good policy or will work is another question. 

The plan itself does five things.  First, it cuts social security contributions for individuals and businesses.  Second, the plan provides about $35 billion to states to operate schools and another $25 billion in school infrastructure spending.  Third, the plan adds about $54 billion in unemployment insurance payments, extending the program and adding youth employment programs and tax incentives to hire the long-term unemployed.  Fourth, the program adds $75 billion in infrastructure spending to include the creation of an infrastructure bank.  Finally, the plan reduces barriers to refinancing FHA loans for households who are underwater in their mortgages. 

To begin understanding what this plan can do, we have to look at the February 2009 stimulus.  That plan illustrated the slothful pace of infrastructure spending impacts in eye-opening fashion.  There really are no shovel-ready projects.  The notion that Congress could pass, allocate and transfer dollars to states that then prioritize projects, bid them out, award contracts to businesses who then plan, hire and purchase materials in something like a year is flat-out ridiculous.  This worked in the Great Depression, when tens of millions of young men picked up shovels, built roads, planted trees and even finished the Appalachian Trail.  Today it would take decades to simply complete an environmental impact study on the Appalachian Trail, much less build it.  Infrastructure spending in America might be needed, but it is not short-run stimulus.  So, the $100 billion or so of infrastructure spending will be a nice addition to the 2013, 2014 and 2015 economy.

States that are laying off teachers because of past fiscal profligacy will get a break next year.  One might suppose that this prolongs the agony, which it does.  The same can be said about extending unemployment compensation, which—I noted in a recent column—keeps unemployment rates high (a view shared by Dr. Alan Krueger, Obama’s chief economist). 

My estimates suggest that the effect of increased unemployment compensation and lower payroll taxes is a roughly three-quarters of a percent boost in growth, and a further 925,000 more jobs by the end of 2012.  This would reduce the unemployment rate by perhaps 0.4 percent.  It is well that these jobs cost only $515,000 apiece otherwise this plan might be mistaken for electioneering.  

Both the benefit and curse of a fiscal stimulus is that it shifts economic activity from the future to the present.   It is a benefit if most people believe future growth will make the losses from the stimulus negligible.  It is a curse if most people believe the future costs will lead to higher taxes.  I hope for the first, but am preparing for the latter.  It is just this sort of anticipation of higher taxes that is now stalling the economy, and why the efficacy of this plan is questionable.

Link to this commentary: https://commentaries.cberdata.org/588/the-efficacy-of-the-american-jobs-act

Tags: economy, jobs and employment, stimulus


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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