Obama's jobs plan reinvigorates growth outlook
United States President Barack Obama’s jobs package could lift US economic growth by one to three percentage points in 2012, add well over one million jobs and lower the unemployment rate by at least half a percentage point, judging by early estimates.
It might not exactly deliver the “jolt” Obama claimed in his speech to Congress Thursday night, but it would be enough to make a difference.
The basic idea is to give a sufficient boost to get the stalled recovery over the hump where households, banks and businesses have paid down more of their debt loads and regained the confidence to start spending, lending and hiring again.
Once demand picks up, the private sector will kick in and begin hiring, and the fiscal props can fall away.
It would deliver the economic medicine prescribed in recent weeks by Federal Reserve chairperson Ben Bernanke and the International Monetary Fund to prevent a worrisome slowdown in global economic growth from turning into recession.
Pulling its weight
US Treasury Secretary Timothy Geithner also can assure his fellow finance officials at the G7 meeting of top industrial nations in Marseilles on Friday the United States is pulling its weight.
The wild card of course is whether a Republican-dominated US House of Representatives will agree to the full $447-billion package, an unlikely prospect given their criticism that the $830-billion stimulus program of February 2009 failed to deliver lift-off for the US economy and added to the huge US budget deficit.
The US economy is so scarred by the 2007 housing credit implosion, the bank failures it triggered in 2008 and the deepest recession in 70 years that it is taking a very long time to recover and create jobs.
“What you come down to is that there is no silver bullet, no magic bullet that this president or anyone can propose that would drive unemployment down to 5% in the next year,” said Joel Prakken, chairperson of Macroeconomic Advisers, an economic modelling firm in St Louis.
“It has to come from the private sector and for that you have to work through the overhang from the housing crisis that is suppressing aggregate demand,” he said.
This suggests that Obama’s jobs program most likely would serve as a palliative, not a cure, leaving room for the Federal Reserve to provide further monetary stimulus to keep the economy from slipping back into recession.
Analysts at Capital Economics estimated that Obama’s plan is equivalent to 3% of US GDP and should be enough to add significantly to 2012 growth if passed in full by Congress.
The biggest single boost could come from a $250-billion reduction in payroll taxes. Obama proposes extending an existing 2% cut in the payroll tax and increasing its size to 3.1% for workers, and adding a cut for employers.
“These payroll tax reductions are the proposals that have the greatest chance of getting passed by Congress because it will be harder for Republicans to vote against proposed tax cuts,” said Paul Ashworth, chief US economist for Capital Economics.
The tax cuts could add as much as $375-billion to economic output to the $14-trillion US economy, based upon Congressional Budget Office (CBO) estimates in August of the economic impact that fiscal stimulus programs can have on GDP.
But not all of that would be fresh stimulus money, since a $112-billion payroll tax cut is already in place and would simply be extended. Additionally, the full impact would be lessened because it does not target lower income workers.
“It gives money disproportionately to people at the top of the income scale.
Higher income individuals are more likely to save the money, they don’t need to spend it on essentials, so the effective impact is lessened,” said Roberton Williams, senior fellow at the centrist Urban-Brookings Tax Policy Centre.
Still, Macroeconomic Advisers estimated that the 2% payroll tax cut extension alone would add 400 000 jobs and boost GDP in 2012 by 0.5%. The larger sum might increase that to roughly 0.7% GDP and 600 000 jobs.
Investing in infrastructure
The second biggest element in Obama’s plan is the $105-billion in infrastructure investment, which could add as much as $262-billion to the economy, based on the CBO figures.
Macroeconomic Advisers estimates that could create about 150 000 new jobs in the first year and add over half a million jobs over three years—good news but small for an economy that usually generates over two-million jobs a year when in good health.
The challenge also would be to find “shovel-ready” projects where highways, railroads or school renovation plans are on the drawing board awaiting funding. Otherwise it can take years to get major construction projects under way.
Extending unemployment benefits, which total $49-billion in Obama’s plan, also has a significant impact. It could add up to $102-billion to the economy. Macroeconomic Advisers estimates it would add 0.25% to GDP growth in 2012 and create 200 000 new jobs by putting extra cash in consumers’ pockets.
Economists were re-running computer models late on Thursday to update their figures. Based on a smaller $300-billion stimulus package that Obama unveiled, Ian Shepherdson, US economist at High Frequency Economics, had estimated a 1.3% boost to GDP and 1.7-million jobs over the life of the programmes.
Their initial reaction was if it were adopted in full, which is quite unlikely, the plan would lower the 9.1% unemployment rate closer to 8% in 2012 and give a welcome boost to an economy that grew at a 1% annual rate in the second quarter. But it is does not guarantee solid recovery.
“Is this going to be more than a panacea for our problems? It is hard to tell,” said Williams. “This downturn has been deeper and longer than anything we have seen since the 1930s and we don’t fully understand it. What we do know is that what we did in 2009 was not big enough.”—Reuters