The Obama Jobs Proposal Is Less Than Stimulating

After over a year of Presidential and Congressional debate and sparring about how to reduce spending, cut deficits, and limit debts, the politicians in Washington have finally taken notice that we have a “jobs crisis”.  Specifically, we simply aren’t creating new employment fast enough to reduce our high levels of unemployment.

Timidity wrapped in strong words does not make boldness. The words on the teleprompter were bold and the President almost sounded passionate and concerned about jobs.  Unfortunately, in my opinion, this proposal is too timid. I see repeats of the errors of 2009 and the first stimulus bill, the ARRA.

First, let’s go over the details of the proposal.  The White House Fact Sheet is here. I’ll let Calculated Risk summarize the key parts for me:

1) Payroll tax cuts (approx $240 billion):

• Cutting payroll taxes in half for 160 million workers next year: The President’s plan will expand the payroll tax cut passed last year to cut workers payroll taxes in half in 2012 …
• Cutting the payroll tax in half for 98 percent of businesses: The President’s plan will cut in half the taxes paid by businesses on their first $5 million in payroll …

2) Schools and teachers / aid to states (approx $60 billion):

• Preventing up to 280,000 teacher layoffs, while keeping cops and firefighters on the job.
• Modernizing at least 35,000 public schools across the country,supporting new science labs, Internet-ready classrooms and renovations at schools across the country, in rural and urban areas.

3) Other infrastructure ($75 billion)

4) Extend unemployment insurance benefits ($49 billion).

5) Helping More Americans Refinance Mortgages (there are no details yet). “The President has instructed his economic team to work with Fannie Mae and Freddie Mac, their regulator the FHFA, major lenders and industry leaders to remove the barriers that exist in the current refinancing program (HARP) to help more borrowers benefit from today’s historically low interest rates.”

In total the whole package is estimated as a near $447 billion package of tax cuts and spending.  That sounds like a lot. And at first comparison it seems like a lot. The 2009 ARRA “stimulus” bill was approx. $780 billion spread out over 2.5 years. This “American Jobs Act” is supposed to be only a one year deal (part of the problem, by the way), so it sounds like it’s more in one year than the 2009 stimulus bill was.  But it’s not really.

For any government action, be it increased spending, tax cuts, or regulatory reform, to be a stimulus effect, it must provide a net change beyond what is currently happening.  That’s a major reason why this proposal fails as a stimulus.  Over half of the proposal, the $240 billion in payroll tax cuts provides no new stimulus beyond what’s happening this year already.  These payroll tax cuts, which should be called  cuts in funding for Social Security and Medicare, aren’t really a tax cut from what’s happening now.  It’s a proposal to delay the return to higher rates.  Payroll taxes were already cut temporarily for one year at the beginning of this year as part of the deal with Congress to extend income tax cuts for the highest-income bracket folks.  But that was only supposed to be a one-year cut.  This proposal basically extends that cut for another year and postpones the return to normal tax rate for another 12 months.  If these payroll tax reductions were enough to put people back to work in large numbers we would have seen it happen already.  We haven’t.  Deciding to delay applying the brakes as you had planned is a good thing, but it hardly qualifies in my book as hitting the accelerator.

In a similar fashion, the $60 billion in aid to states & local governments to help prevent teacher, police, and firefighter layoffs is a good and positive measure.  But it’s not really stimulus.  It’s a step that keeps the states and local governments from harming us further through their budget cuts.  I am concerned this only kicks the can down the road a little further, perhaps another 12-15 months, when state and local governments will repeat the layoff drive. Of course, if I were cynical, I’d observe that 12-15 months doesn’t really change the long-run growth picture for the U.S. but it’s enough to delay any second dip into recession until after the next presidential election.

We see the same dynamic in the extension of unemployment benefits.  Make no mistake, this is a seriously needed action for both economic and moral reasons.  But it won’t have a lot of stimulus bang – certainly less than the $49 billion sounds like.  That’s because it’s basically restoring the existing unemployment benefits that are expiring for the long-term unemployed.  Thus it will help prop up existing aggregate demand, but it’s not likely to deliver much new stimulus punch.

Part of the $60 billion  for schools and teachers (the White House doesn’t split it out) is aimed at infrastructure re-building for schools.  My estimate is that maybe it’s half of the $60 billion, or $30 billion.  That portion, along with the $75 billion in other infrastructure spending constitutes real stimulus.  It’s additional spending that will translate directly into new jobs. Those new jobs will then have a multiplier effect as these workers spend their money.  Unfortunately, both of these items together total maybe a little over $100 billion.  Even with estimates of spending multipliers on the high side at 2 or 3, it means a boost of maybe $200-300 billion in GDP.  But we’re in a more than trillion dollar hole of lost GDP potential.  So, yes, there’s some stimulus here, but it’s far too little.  Just like the 2009 stimulus bill was too small and too slow.

There are of course, some other items in the proposal.  I don’t see them having any effect.  There are proposals for some tax credits for small businesses to hire some businesses.  I don’t see that working.  Businesses hire because they are selling things, not because they can get a $5,000 tax credit.  There’s simply not enough aggregate demand for businesses to hire.  There’s also a pitch about helping Americans “refinance mortages”.  They tried this in 2009 and the program has been a miserable failure with very few refinancings done.  The incentives simply are wrong for the banks.  The proposal lacks specifics other than the President will “urge” agencies to do more.  I am skeptical.

So overall, I am disappointed.  Much of this stimulus proposal amounts to agreeing to delay the current contractionary policies.  That’s not the same as stimulus.   Too little. Too late.  And let’s remember, there’s not much chance that this Republican House of Representatives will pass much, if any, of this proposal.

State and Local Job Cuts are Accelerating, Making the Economy Worse and Cutting Education

Nicholas Johnson at the Center on Budget and Policy Studies explains how state and local governments are cutting jobs and how a majority of those jobs lost are education jobs.

September 2, 2011 at 1:24 pm

Three Years of State and Local Jobs CutsToday’s jobs report shows that in August, cuts by states and local governments — especially school districts — wiped out private-sector job gains.

The state and local sector cut 15,000 jobs in August.  That comes on top of a whopping 66,000 jobs lost in July, according to revised figures released today — the worst single month of job loss for states and localities since the recession began in December 2007.  States and localities have eliminated 671,000 jobs since employment peaked in August 2008 (see first graph).

Not coincidentally, July was also the first month of the new fiscal year for most states, one in which they are facing the double-whammy of weak revenues (which remain well below pre-recession levels) and the expiration of temporary federal aid.

Three Years of School Job CutsSome 14,000 of the state and local jobs lost in August were in local school districts, bringing to 293,000 the total decline in school-district employment since August 2008 (see second graph).

Cuts in state education funding are a big reason behind these education-related job losses.  As we reported yesterday, the vast majority of states for which data are available are cutting basic education grants to local school districts to below pre-recession levels.  Some of the cuts exceed 20 percent.

These troubling numbers raise a disconcerting question:  What kind of an economic future will this country have if we keep cutting education?

Jobs And Unemployment Report For August 2011 – More Bad News, More Signs Economy Is Stalled, No Net New Jobs

This being the first Friday of the month, the latest U.S. employment report was released this morning.  Not good news.  In a nutshell:  no new net jobs created and the unemployment rate holds steady at 9.1%. It disappointed even the weak expectations of forecasters. The news continues to show an economy that has stalled without recovering and is in danger of relapsing to recession. CalculatedRiskBlog does it’s usual exemplary reporting of the latest monthly jobs and unemployment report:

From the BLS:

Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major industries changed little over the month. Health care continued to add jobs, and a decline in information employment reflected a strike. Government employment continued to trend down, despite the return of workers from a partial government shutdown in Minnesota.

The change in total nonfarm payroll employment for June was revised from
+46,000 to +20,000, and the change for July was revised from +117,000 to +85,000.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image in graph gallery.

The unemployment rate was unchanged at 9.1% (red line).

When looking at the detailed numbers we find that the private sector created a net total of 17,000 new jobs.  Unfortunately this was entirely offset by government reducing employment by 17,000 jobs.  I suppose for Tea Party and Conservative types who blame government for most all economic ills and who fantasize about a society with no government, this is moving towards their ideal economy.  Somehow, I don’t see it that way.

Further details behind the numbers show that the number of private sector jobs was likely understated by 45,000 since during the survey week the 45,000 Verizon workers who were on strike were not counted as having jobs.  Those jobs will return in the report on September, assuming Verizon doesn’t lay off some of them.

Overall, the picture for recovering from the Great Recession has been turning bleaker.  We were never on a very robust path for recovery at all during the last 2 years.  However, now what modest slow momentum we had towards job recovery has stalled and job recovery has essentially flatlined.  At the current rate, we never recover the jobs lost in 2008-09 until at least a decade has passed, if that.  This is definitely starting to look like depression territory, not “recession”.  The following graph, also from Calculated Risk,


Percent Job Losses During Recessions

The second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

The red line is moving sideways – and I’ll need to expand the graph soon.

The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemploymentrate (only the early ’80s recession with a peak of 10.8 percent was worse).

The details in the report also show more depressing (sorry for the pun) news:

  • U-6, an alternate unemployment rate measure that includes both traditional unemployed (no job but looking), part-time workers who want but can’t full-time hours, and some other marginally-attached workers has risen to 16.2%, a new high for this year.
  • There are 13.967 million Americans unemployed now.
  • Of those unemployed workers, 6.0 million have been without a job and looking for work for over 6 months.
  • The previous reported totals for both June and July were revised downward.

 

President Obama’s Jobs Advisor Ships Jobs Overseas.

No wonder jobs aren’t being created.  The President listens closely to Jeffrey Immelt, the CEO of corporate welfare recipient large multinational General Electric about jobs policy.  So what’s GE doing about jobs?  Bloomberg reports:

General Electric Co.’s health-care unit, the world’s biggest maker of medical-imaging machines, is moving the headquarters of its 115-year-old X-ray business to Beijing to tap growth in China.

“A handful” of top managers will move to the Chinese capital and there won’t be any job cuts, Anne LeGrand, vice president and general manager of X-ray for GE Healthcare, said in an interview. The headquarters will move from Waukesha, Wisconsin, amid a broader parent-company plan to invest about $2 billion across China, including opening six “customer innovation” and development centers.

The move follows the introduction earlier this year of GE Healthcare’s “Spring Wind” initiative to develop and distribute medical products and services in China, GE said in a statement today. More than 20 percent of the X-ray unit’s new products will be developed in China, LeGrand said.

Read more: http://www.bloomberg.com/news/2011-07-25/ge-healthcare-moves-x-ray-base-to-china-no-job-cuts-planned.html#ixzz1UjwUi6Yu

Gov. Rick Snyder Invokes the Magic Job Genie

The mantra of Republican governors (and in Congress) has been that taxes must be cut in order to create jobs.  In previous posts I’ve dealt with the confusion about how federal level changes income taxes  might or might not affect the strength of the economy. Most of the federal tax discussion focuses on individual income taxes.  But at the statehouse level, Republican governors have been pounding a theme that claims business tax cuts will drive economic growth in general and job creation in particular.

In Michigan, Republican Governor Rick Snyder has just pushed through a massive restructuring of Michigan taxes.  The old Michigan Business Tax (a complicated scheme applying to all businesses) was repealed.  In it’s place is a new corporations-0nly 6% profits tax. The new tax collects only a small fraction of the revenue the old tax did, so individual tax burdens have been increased, particularly on seniors and low-income folks.  In summary, it is a giant tax shift: lower taxes for businesses and higher taxes for individuals, especially the poor and seniors.

Why?  Jobs, we’re told. The Governor, a self-proclaimed very smart person (“nerd”), keeps telling people that Michigan needs new jobs and the way to create them is to cut business taxes.  Even before the new tax cuts were officially passed, the evidence is starting to come in that the idea doesn’t work, as shown here.  But the governor continues to claim jobs will result if we only cut business taxes.  I’m skeptical, but willing to listen.  After all, he’s a really smart person (his campaign ads keep telling us that, so it must be true, right?)  So I was very excited this morning as I’m driving to work  and listening to Michigan Public Radio  (recording of program as MP3 available here) to hear the Governor would be on the show live.  Maybe he could enlighten me about how this “tax cuts create jobs” stuff works.

The very first question was fantastic.  An alert listener asked (I’m paraphrasing from memory): “Precisely what empirical evidence exists that your business tax cuts will create additional jobs and just how many jobs should we expect?”  Snyder couldn’t give a straight answer.  He immediately responded with “It’s just a matter of basic economics. When a business have more money or resources it can create more jobs” (again paraphrase).

Unfortunately for the people of Michigan, Snyder has it all wrong.  That’s not basic economics.  He’s thinking basic accounting.  Basic economics says businesses will hire more workers when they perceive there’s demand (spending) for their product at profitable prices.  Taxes don’t really enter into it.  That’s not just basic economics theory, it’s also confirmed by repeated surveys of business managers.  Tax rates, particularly state tax rates, are waaaaay down the list of factors important in deciding on hiring and staffing levels.  Snyder should know better.  He himself, when he was CEO of Gateway Computers, moved the company from South Dakota, a low tax state, to California, a very high tax state?  Why would he have done that if taxes were so important?

The moderator, Rick Pluta, to his credit, didn’t bail out Snyder but moving quickly to the next question.  Instead we were treated to the Governor claiming that “it’s not possible to pinpoint exactly how many or which jobs might be created by the tax cuts, but we believe it will happen”.  That’s my point here. There is no evidence. There is no sound theory.  Instead, what we have is a faith-based policy.  We cut taxes for businesses in total and eliminated them completely for thousands of businesses in belief  that jobs will be created.  There’s no real evidence.  There’s just a belief in the magic jobs genie*.  The jobs genie only comes out when taxes are cut.  And when taxes are cut, the genie just magically appears and inspires businesses to go crazy and say “Hey let’s hire people. Let’s create jobs!”

Snyder then proceeded to offer his only empirical evidence. “We have some surveys where many of these small and medium businesses say they would consider creating new jobs in response to this bill”.  The Governor’s a lousy social scientist and economist.  Contrary to Snyder’s claims, it is possible to study and quantify this stuff.  Applied economists have done this stuff for decades. It’s our bread-and-butter.  There are  many studies on the jobs impact of state business tax cuts.  The evidence does not support Snyder’s position.  Indeed, contrary to his claims that they don’t know how many jobs will be created, the state treasurer and budget office must necessarily make estimates of state employment under different tax schemes in order to make budget forecasts.  Snyder is hiding because the evidence doesn’t support what he wants to claim.  He prefers to conjure magic beings like the jobs genie.

Snyder did say that employment is how he should be measured as governor.  What he didn’t say is that the appropriate measure is how much Michigan’s employment grows relative to the national average.  If the U.S. as a whole simply manages to not have a major recession while he’s in office, then Michigan employment will grow.  The U.S. economy as a whole is the dominant influence on Michigan employment, not what the state government does.  But, the policies of the state government have a major influence on whether the state does better or worse than national average.  For the last approx. 15 months, Michigan has performed significantly better than the national norm, albeit Michigan started in the worst condition.  (Nevada has that title now).  The clock is ticking now.  It’s up to Snyder to prove that, contrary to historical evidence and his own prior business decisions, that state business tax cuts will create faster than national average job growth.

* The magic Jobs Genie is only one of a pantheon of magical creatures that animate the economic theories of many politicians these days.  There’s also the Banking Unicorn and the Investment Confidence Fairy and others.  I’ll talk about those in future posts.

Is Our High Unemployment Structural?

So following up on my post on the types of unemployment, when unemployment is high, how do we know if it’s due to structural or cyclical causes?  The answer is important because it tells us what kind of policy actions to take.  Do we need stimulus? (addresses cyclical), or do we need job-retraining, relocation, and education? (targets structural).  There is no clear cut way to tell how much of each type exists.

For example, suppose unemployment is 9%, much as it is today.  Let’s assume that this is a seasonally adjusted number, so we can assume that none of the 9% represents seasonal.  Let’s further assume, just for the sake of arguement, that 5% points of the 9 points represent frictional unemployment.  I should note that this is a somewhat controversial point.  I do not personally think that frictional is in fact that high nor that it we cannot get below that point. Personally I don’t see why frictional should be greater than 2-3%. My views on this are heavily influenced by Bill Mitchell and the MMT people. But since mainstream economics since Milton Friedman has defined it so, let’s accept frictional unemployment as being 5% just for the sake of this argument.  That means there’s another 4% points of the 9 points that must be either structural or cyclical. How can we tell the difference?

There’s no clear-cut way to tell as in doing some direct survey.  Instead we need to look at some indirect indicators.  Two of the more indicators we could look at are: the job seekers  to job openings ratio and unemployment by industry or state.  If our high unemployment is primarily due to structural factors then we should see a low ratio of job seekers to open jobs, and we should see wide differences in unemployment by industry or geography.  If we see low ratio of job seekers to job openings, then that means there are jobs in aggregate but apparently those seekers (unemployed) are unqualified. If we see wide differences in unemployment by industry or geography, it indicates again that jobs exist but they aren’t where the workers are.  On the other hand if the seeker-openings ratio is high, then that means there just aren’t enough jobs period – workers outnumber jobs.  If unemployment is high across all industries and locations, then again there is no unsatisfied sector. There is no structural unemployment.

So with that in  mind, let’s look at the data.  First, via StateofWorkingAmerica.org, we have the job seekers-to-job openings ratio (called the JOLTS data series):

Job Seekers to Job Openings Ratio, US, 2001-2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Yep, it’s pretty high – between five and six workers for every open job.  Next, let’s consider unemployment across industries.  This via Paul Krugman:

here’s the increase in unemployment 2007-2010 by industry of previous employment:

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See the structural shift? Neither do I. As others have noted, basically unemployment doubled for every industry, every occupation, every state. Where are the sectors/occupations/regions gaining jobs? Nowhere to be found. There’s nothing structural about it.

But what about geographic mismatch? Let’s go to the state-by-state unemployment numbers from Calculated Risk:

Unemployment Rates by State, Dec 2010

 

 

 

 

 

 

 

 

 

 

 

Still no mismatch. Yes, there are three states under 5% and two more under 6%, but these states are the Dakotas, Nebraska, New Hampshire and Vermont.  Relatively speaking, nobody lives there.

So overall this means it’s not structural unemployment that is keeping unemployment high.  It’s cyclical unemployment.  That means the route to lower unemployment is more stimulus, not austerity. Better yet, a jobs guarantee program could work very effectively.