CQ TODAY ONLINE NEWS
Sept. 13, 2011 – 10:42 p.m.
Plan’s Effect on Jobs Under Debate
By Joseph J. Schatz, CQ Staff
To sell its job creation plan to Congress, the White House will have to prove the proposal’s merits to skeptical Republicans in both chambers. That is likely to be a tall order.
The administration faces a conundrum that has bedeviled other economic policy proposals — that the jobs program might boost economic growth broadly while doing relatively little to induce companies to take on new workers.
The White House and some top economic forecasters insist the bill (
That is a particularly important concern, because the tax incentives are the one piece of the package most likely to become law.
The tax cut portion is “probably the only thing in the package that is going to get bipartisan support,” said Sen.
Obama has also proposed more than $100 billion in infrastructure spending and state aid. Yet while such spending gets high marks from many economists who try to estimate the effects of fiscal policies, it is opposed by many Republican lawmakers. Extended unemployment insurance, which Obama also included, would likewise provide an economic boost — although winning GOP votes to advance that part of the package may also prove difficult.
Moreover, conservatives argue that none of the infrastructure spending, state aid or jobless benefits provided in 2009 and 2010 did much to spur job growth. That is an argument the White House cannot easily counter. Although many economists contend that the 2007-09 recession would have been harsher without congressional action, in politics it is always hard to take credit for not allowing things to get worse.
Hard for Government to Create Jobs
Short of directly putting people to work, as Franklin Delano Roosevelt did in the 1930s and as Jimmy Carter tried to do in the late 1970s, the federal government has limited tools to create jobs and get them filled. The task is even more daunting in a time of stagnant recovery, in which many companies have the cash to employ workers but no real reason to hire them.
Relatively slack demand from consumers leads companies to curtail production and hiring for fear that buyers will not be willing to snatch up the new products.
The Congressional Budget Office (CBO) said in a report last year that a Social Security payroll tax cut, for both workers and employers, is one of the quickest ways to increase overall economic demand — by putting extra cash in people’s pockets — and thus spark hiring. Yet CBO also noted that one effort to do so, the “New Jobs Tax Credit” of 1977 and 1978 — through which companies that increased total employment by at least 2 percent received a tax credit — resulted in “inconclusive results.”
More recently, in March 2010, Congress tried a targeted approach to job creation by approving a tax incentive for companies that employed jobless workers as part of the so-called HIRE Act (PL 111-147).
Obama’s jobs plan refined that approach, using a series of very narrow tax breaks, against the backdrop of a stubborn 9.1 percent jobless rate and the reality that other jobs measures are not politically viable in the GOP-controlled House.
Plan’s Effect on Jobs Under Debate
The White House plan would expand and extend the temporary reduction in the employee share of the Social Security payroll tax cut enacted in 2010, and also cut in half the employer’s share of the tax for 2012, for the first $5 million in payrolls. Companies that hire new workers or increase the wages of existing workers would get an additional tax break.
Mark Zandi, chief economist at Moody’s Analytics, estimated in a Sept. 9 article that the Obama plan would create as many as 1.9 million jobs. Zandi said the combination of the tax incentives “would give firms a substantive incentive to increase hiring and should result in a larger economic bang for the buck — additional GDP per tax dollar — than previous job tax credits such as last year’s HIRE Act.”
Others are not so sure. That is because a hiring tax incentive does not directly address the lack of demand that is the reason companies are not taking on new workers.
Macroeconomic Advisers, a St. Louis-based consulting firm, predicted in a Sept. 12 report that the Obama plan would boost economic growth by 1.25 percentage points in 2012, and raise total employment by 1.3 million by the end of 2013. Yet the firm expressed “suspicion” about whether the tax breaks would promote hiring, since they would be temporary and low aggregate demand would not be elevated much.
“It seems unlikely to us that in today’s weak economy, the credit would compel firms to incur the fixed costs of first increasing and then decreasing their labor/capital ratio all within a year,” the firm wrote.
Democrat
Senate Republican leaders will not say whether they will support elements of the Obama plan, stressing that last year’s payroll tax cut came as part of a larger deal to extend the Bush-era tax cuts. But there are rising voices of opposition from the rank-and-file GOP conservatives in the House.
Addressing Demand
The expansion of the existing employee-side payroll tax reduction is geared more toward addressing the demand problem than the employer tax breaks.
At a minimum, an extension of the worker tax cut might prevent consumer demand from weakening. Allowing the tax cut to lapse would “shave 0.9 percentage points off 2012 real GDP growth and cost the economy some 750,000 jobs,” Zandi said.
It’s an “elegant” mechanism, said one senior administration official, since it simply puts more money in workers’ paychecks without their having to do anything.
Still, it is difficult to measure the impact of the 2010 payroll tax cut nine months after it was enacted. The White House says it helped cushion the blow of high oil prices and kept the economy from slowing even more than it has. But some top Republicans point to the lack of job growth as evidence that earlier policies have not worked.
“There has been zero evidence that it moved the needle last year, and nothing suggests doing it again, albeit in a larger way, would increase hiring,” said a GOP aide.
Plan’s Effect on Jobs Under Debate
At the same time, Republicans may find it hard to vote against a big tax cut, and in the current political climate, lawmakers are wary of doing nothing to address the lack of jobs. That is why some top Republicans are signaling support for renewing the payroll tax cut.
But forecasting how many jobs the plan might produce is a crapshoot. The administration learned that lesson when its job growth predictions for the 2009 economic stimulus (PL 111-5) fell short and handed Republicans potent political ammunition.
White House budget chief