Three Things to Love (and a Few More to Hate) About Obama’s Jobs Plan Print
Dean Baker
The New Republic, September 15, 2011

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President Obama created big expectations last week for the speech where he announced his new jobs plan. Remarkably, his rhetoric came close to fulfilling them. But what about the actual plan he sent to Congress on Monday? If it were to be enacted in its current form (which it won’t), would it have a shot at turning around the economy? As it turns out, there are definitely some things to like in Obama’s roadmap, even while there are some very big warning signs as well.

On the plus side, President Obama asked for a sizable package. The cost would be $450 billion, with most of the expense in the 2012 fiscal year. By contrast, after removing the fix to the alternative minimum tax, the 2009 stimulus package came to about $300 billion a year in both 2009 and 2010. After seeming determined to think small, Obama is asking for something resembling real money. Of course, this is still well short of what is needed to get the economy back to full employment. The collapse of the housing bubble led to a falloff in housing and consumption demand that together is close to $1.2 trillion annually.

The mix in the plan is also better than might have been expected. President Obama proposed $35 billion in aid for state and local governments to prevent more layoffs of school teachers, police, and firefighters. This is a great way to boost the economy since there is no quicker way to increase demand than to prevent cutbacks that would otherwise occur. While the request in this area is good news, it could have usefully been two or three times as large, although a larger request would face a greater risk of being laughed off by the Republicans in congress.

President Obama also proposed $80 billion for infrastructure. 30 billion of this is for repairing and renovating schools and $50 billion is for other infrastructure needs. The downturn has provided a great opportunity to modernize our infrastructure. We can essentially borrow at zero cost (real interest rates are negative) and there are millions of unemployed construction workers. The money requested by Obama would be a step in the right direction, if Congress were to approve it, but it is nowhere close to the sort of grand infrastructure modernization vision many had hoped for.

As always, we must remember infrastructure spending takes time. Even if Congress passed Obama’s bill “now,” as he demanded, we would be lucky to see even one-third of this money spent in 2012. This is fine because we have every reason to believe that the economy will still need a boost in 2013, 2014, and 2015, but no one should think that this spending will create jobs tomorrow.

The package also includes the essential continuation of extended unemployment benefits. This is both a boost to the economy and provides essential support to millions of workers who have been unemployed for more than 26 weeks. These workers will lose benefits if the extended benefits program expires at the end of 2011.

On the somewhat-more-worrisome side, Obama also proposed extending the 2 percentage point payroll tax cut to employees and increasing it to 3.1 percentage points (half of the Social Security tax). He also proposes to apply an equal size tax cut to the employer’s side of the tax on the first $5 million of business payrolls. There are two issues raised by this proposal.

First, the tax cut on the employer side is largely a gift to businesses that mostly do not need it. As a group, businesses are sitting on huge amounts of money and pulling in a record share of national income in profits. Giving them even more money is unlikely to have much effect on generating demand or creating jobs. On the plus side, limiting the tax cut to the first $5 million of payroll reduces the cost. It also means that at least some of the money will go to struggling businesses that really need it.

The second, more important issue raised by the tax cut is its linkage to Social Security. We are being told that it is the Social Security tax that is being cut, but there is no reason that Obama’s proposed tax cuts have to be tied in any way with the Social Security tax. Congress can vote to give whatever amount of tax cuts or credits that it wants to whichever individuals and businesses it wishes. There is no reason that the tax cuts have to be tied to Social Security’s solvency. The fact that they are linked raises some real concerns.

Under President Obama’s proposal, the Social Security trust fund would be credited with an amount equal to the lost tax revenue from the general budget, so in principle it is not affected by the tax cuts. However, as a practical matter, there is a serious issue about how this tax will be raised back to its 2010 level.

Restoring the 2010 tax rate at the end of next year, or whatever point the economy no longer needs the boost, will likely be portrayed as a tax increase on working people by Republicans and those seeking an overhaul of Social Security. (The Democrats have already given us a preview of this pitch, attacking Republicans who oppose extending the payroll tax cuts for wanting to raise taxes on working people.) If the Democrats can’t find the political will to restore the 2010 Social Security tax rate, then the program will soon face the serious revenue shortfall that has been advertised for decades.

That is not good news at a time when the collapse of the housing bubble has made the program more important than ever to retirees. We should be discussing ways to enhance Social Security to ensure that retirees have adequate income. Instead, we may see increased pressure to cut benefits if these tax cuts are made permanent.

The plan also includes two interesting labor market experiments. One of them is a limited wage subsidy that can be seen as an updated version of the Comprehensive Employment and Training Act (CETA) Program of the 1970s. The other is “work sharing,” which is based on the idea that employers should be encouraged to shorten work hours rather than lay off workers.

The wage subsidy takes the form of eliminating the employer side of the payroll tax on increases in wage payments compared to the prior year. In principle, firms that hire more workers, extend the hours of their existing workforce, or increase the pay of their existing work force would get a subsidy equal to the employer side of the Social Security tax, or 6.2 percent.

In addition to having the problematic linkage to Social Security, this idea also suffers from the fact that economists have good reason to believe that employment is not very responsive to subsidies along these lines. There is now a large body of research showing that moderate increases in the size of the minimum wage have little or no effect on employment.

If we think that raising the cost of labor by 15 percent through a minimum wage hike does not lead to a loss of jobs, it is difficult to also believe that a cut in the cost of labor through a 6.2 percent wage subsidy will lead to a big increase in jobs. Therefore it seems unlikely that this proposal will do much to increase employment. Moreover, most of the expense from this incentive is likely to come from firms that would have increased employment in any case. Even when net job growth is zero, we still have millions of firms that are adding jobs—the problem is that it is offset by firms cutting back employment. Of course, some firms will find ways to game the system (e.g. bringing on payroll jobs that had been contracted out), so there will be some costs that are not associated with employment creation at all. The White House estimated that the cost of this incentive, coupled with the employer side payroll tax cut, would be $65 billion.

The other labor market experiment, work sharing, seems more promising. This policy encourages firms to shorten work hours rather than lay off workers. By keeping workers employed, they will maintain their contact with the labor market and continually upgrade their skills rather than risk the debilitating effects of long-term unemployment. The basic plan is to use money that would have otherwise gone to unemployment benefits to make up for some of the wages lost as a result of a reduction in work hours. For example, if workers’ hours are reduced by 20 percent, the subsidy may make the reduction in pay just 10 percent.

Work sharing has been extremely effective in reducing unemployment in other countries, most notably Germany. The unemployment rate in Germany is now 0.5 percentage points below its pre-recession level, even though its growth rate has been only slightly faster than growth in the United States. Even though the economy is not seeing the sort of massive job loss that it experienced following the collapse of Lehman, a work sharing policy could still have a substantial impact on employment. There is enormous labor market churning, with 2 million workers losing their job every month. If this number could be reduced by 10 percent through work sharing, it would have the same effect as creating 2.4 million jobs a year.

There are already 20 states where work sharing is an option in the state’s unemployment insurance program. However, the take-up has been very limited. Part of the reason is that few employers even know that the work sharing program exists. The other reason is that the programs were mostly put in place in the late ’70s and early ’80s and are overly rigid. Obama’s jobs plan calls for passage of a bill sponsored by Jack Reed in the Senate and Rosa Delauro in the House. This bill provides additional funding for the work sharing program for the states that already have it. It also provides some seed money for states that wish to establish programs. To really have a substantial impact on unemployment, however, it will be important to allow more flexibility in these programs.

The final scary part of Obama’s jobs program is how he wants to pay for it. He has said that he wants the congressional super-committee to find additional cuts to cover the cost of the stimulus. In his negotiations with Speaker Boehner over the debt ceiling he suggested a cut to the annual Social Security cost-of-living of 0.3 percentage points. Since this reduction is cumulative, it would lower benefits by roughly 3 percent once a worker has been retired 10 years, by 6 percent after 20 years, and by 9 percent after 30 years. This would be a serious hardship to a population that is already largely struggling.

Obama also suggested raising the age of Medicare eligibility to 67. This would be a real problem for millions of workers in their 60s who already struggle financially to reach age 65, the current age of Medicare eligibility. It also goes the exact opposite direction of the president’s health care bill, replacing the most efficient portion of the health care system, Medicare, with a much less efficient private system. Projections from the Congressional Budget Office imply that that this shift would add almost $4 trillion to the economy’s health care bill over Medicare’s 75-year planning period. President Obama implied in his speech that these cuts to Social Security and Medicare are still very much on the table.

As a practical matter, we know that Congress will not pass whole package now, as President Obama demanded. The payroll tax cuts are probably a good bet, as is the extension of unemployment benefits. For the most part, continuing tax cuts and spending that are already there will just keep the economy running in place. Everything beyond these two measures faces uncertain prospects at best. Congress may approve some additional funding for state and local governments and school repair and infrastructure projects, but the total impact on the economy is likely to be very limited.

This could lead to a situation in which modest short-term gains in growth and jobs are effectively paid for with cuts in Social Security and an increase in the age of Medicare eligibility. Ten years from now, the benefit from these limited stimulus measures will have largely dissipated, but the cuts to Social Security and Medicare will still be there.