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The American Jobs Act, No Luck for 2012

By Saad Asad

President Obama unveiled his $447bn American Jobs Act last Thursday in another attempt to invigorate a waning economy (that produced a net zero jobs in August). Mark Zandi, of Moody’s Analytics, claims it would create 1.9m jobs and the economic consulting firm, Macroeconomic Advisers, claims it would create 1.3m over the next year. However, predictions are only predictions as we learned with the American Recovery and Investment Act in 2009.

Image via James Pethokoukis.

Image via James Pethokoukis.

The current proposal includes the following measures to stimulate the economy:

  • Cutting payroll taxes in half for employees in 2012-$175bn
  • Cutting payroll taxes in half for employers in 2012-$65bn
  • Transportation improvements-$50bn
  • Unemployment insurance and reform-$49bn
  • Teacher and first responder rehiring-$35bn
  • School Modernization-$30bn

Reducing payroll taxes for employees is an extension of last year’s tax deal, but there is little evidence to indicate it would have an immediately simulative effect. The tax break hits those already employed and many high-earners who have a higher likelihood to save. Saving is fine for the long-term, but the economy needs the consumer demand now. Further, money that isn’t saved is used to pay down debt which is important but will produce nil economic benefits for 2012.

Also, since this is touted as a temporary tax break, many people won’t even bother to spend the extra money. Few will decide to buy a $35,000 car instead of $25,000 one, nor will someone move in to a new apartment with higher rent if the extra income they earn will be gone next year.

Next, the employer tax break will have little effect without consumer demand to back it up. Labor costs aren’t the reason employers won’t hire; hence, reducing the cost from $40,000 to $38,800 won’t incite much additional employment.

Pundits frequently cite a Congressional Budget Office (CBO) study to prove its effectiveness claiming for every $1 spent on employer tax breaks, the economy will produce $1.2 in output. However, 1.2 is the higher end of a large range, and at the bottom of the range is 0.4 meaning for every $1bn spent, only $400m would be created in output. This reflects economists’ general uncertainty about the effectiveness of this measure.

Moving on, infrastructure projects, transportation or school-related, can certainly boost employment, but the primary problem is implementation delay. President Obama famously quipped about the 2009 stimulus that “shovel ready wasn’t as shovel ready as we thought.” There’s no reason to believe this will be any different, and we may not see the fruits of this labor until 2013 or later.

Additionally, $50bn on transportation infrastructure is simply too small and is a 40th of what the administration says is needed to fix our declining roads, highways, and rail systems. Admittedly, Republicans would balk at anything higher (and are already balking at this number), but this is meager help for the unemployment problem.

Unemployment insurance is touted as one of the most effective stimulus measures since those who receive it have an immediate incentive to spend now and not save. Conservative economists like N. Gregory Mankiw argue that it discourages people from searching for jobs. However, no amount of desperation on the part of the unemployed will increase hiring as there is just insufficient consumer demand. However, the President intends to include the following reforms: work-sharing, a “Bridge to Work” program, and wage insurance.

First, work-sharing encourages businesses to reduce the hours of everyone and take a pay cut instead of firing people. Dean Baker from the Guardian explains:

“The way the system works in Germany, a firm will cut back the hours of its workers by 20%. The government then replaces 60% of the lost pay (12% of total pay). The firm is expected to kick in 20% of the lost pay (4% of total pay) and the worker ends up taking home 4% less pay.

In this scenario the worker ends up working 20% fewer hours for 4% less pay.”

Senate Majority Leader Harry Reid’s office claims that if all 50 states adopted work-sharing programs, 400,000 to 500,000 jobs could be saved a year. However, Ramesh Ponnuru from the National Review notes a few problems:

  • “A mid-level IT manager writes, “In the real world, reducing X hours worked to 0.75X, but reducing pay to 0.95X, is called a RAISE.  It’s a payout of more compensation per unit of work.  Absent a commensurate increase in output, this is a net economic loser – a permanent reset of the pay and productivity expectations of that workforce.  What happens, pray tell, when le bon temps roule again – are good workers going to accept a 25% increase in work hours for a 5% raise?  Or will they take advantage of scarcity to make those productivity reductions permanent? (Based on human nature over the last, oh, 5,000 years, I’m going with option 2).”
  • Getting rid of an employee lets the company save on wages and benefits; cutting hours will not lead to a proportional reduction in benefits.
  • Work sharing would prevent the firm from optimizing its productivity: It is, after all, being bribed to handle the reduction of its labor needs in a way it would not otherwise handle it. It might also demoralize the most productive workers, who would be taking cuts to prevent the layoff of less productive ones. Writes one reader: “People doing jobs are seldom interchangeable and it is hard enough to find one right person for any given job. The task of finding two, who can then work together as efficiently as one, may impose cost, coordination, and accountability problems that make work sharing more expensive in a lot of jobs, and completely unworkable in others. Would someone else be able to finish your columns just as well as you could?” (Don’t answer that!)
  • Its potential is limited. In industries where the work is not going to come back after the recession, work sharing would just retard the adjustment the economy needs to make.”

Ponnuru’s arguments note its application may be constrained and could actually harm long-term productivity gains by interfering in the firing decisions of firms.

Second, Obama’s ‘Bridge to Work’ program is modeled after GeorgiaWork$ which places unemployed people with firms for eight weeks like an internship and a chance for a job at the end. However, only 12 people enrolled in Georgia’s program in August and only 92 since February. Mark Butler, the labor commissioner running the program, admitted it was “fraught with problems” and virtually bankrupt when he took over.

Third, the wage insurance program would supplement the incomes of those who took lower paying jobs after being unemployed (usually 50% the difference) so as to incentivize them to immediately pick up jobs instead of waiting it out for one with similar pay. The opposition to this is that it encourages firms to offer lower salaries since the government will make up the difference.

Finally, preventing teacher layoffs and rehiring them is argued to be cost-effective since the teachers would not have to rely on unemployment benefits, food stamps, etc. Further, the population at-large would benefit in the future from a potentially more educated populace, though the amount of teachers saved is not large enough to significantly affect the student-teacher ratio. Also, consider K-12 teaching is not one of the worst hit industries of the economic downturn, so arguably, it could be better spent elsewhere.

Image via Marginal Revolution.

Image via Marginal Revolution.

There is little hope the American Jobs Act will significantly affect unemployment in 2012 due to lack of consumer demand and the inability of this bill to spur it. Household debt is still dragging down the economy and citizens have even less faith in the government to restart the economy ever since the 2009 stimulus failed to meet expectations. Over the long-term, extra tax breaks to pay down debt and infrastructure spending will establish growth, but President Obama may still be saddled by 9% unemployment during the 2012 election. In the worst of ironies, we may see another president economically benefit from this bill because Obama was unable to reduce unemployment numbers in his own term.

2 Comments Post a comment
  1. Robert #

    This is assuming their models are correct, which they are not.

    September 16, 2011
  2. cynics need not reply #

    So…I’m prettttty sure that Robert (see above) is the same “Robert” that used to work for the Guardian and then was fired. ouch. now he’s just spreading his hate elsewhere. how rude.

    Anywayssss, this article is clearrlly well thought out and extremely detail orientated. good work author!

    September 17, 2011

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