The most pressing economic challenges facing the United States remain stubbornly high unemployment and underemployment rates, a legacy of the Great Recession that began at the end of 2007 and from which the labor market has yet to fully—or even largely—recover. In today’s liquidity trap environment, and with further depreciation of the dollar seemingly unlikely, economic growth and employment overwhelmingly hinge on fiscal policy in the near term.
Both President Obama and Republican presidential nominee Mitt Romney contend that they have plans to accelerate job creation, but their two approaches are diametrically opposed. Relative to current budget policies, Obama is essentially proposing to temporarily increase federal spending and give tax credits for employers expanding payrolls to boost employment (i.e., the American Jobs Act, or AJA, provisions that have stalled in the House of Representatives) and raise taxes on upper-income households. Romney is proposing to cut both federal spending and taxes—overwhelmingly for upper-income households—by capping federal outlays at 20 percent of gross domestic product (GDP) while reducing corporate income and individual income tax rates, as well as repealing the estate and alternative minimum taxes (AMT) in entirety. Timothy Noah prognosticates in The New Republic that, “If any of Romney’s tax stimulus remained [after possible “base-broadening” and legislative sausage-making], it would be erased by cuts in government spending. … At this point it’s fair to conclude Romney’s machinations would actually be worsening the economy.” Noah’s pretty much spot on, and we’ve crunched the numbers based on what we view as actionable evidence.
Our new Economic Policy Institute-The Century Foundation briefing paper Who would promote job growth most in the near term? Macroeconomic impacts of the Obama and Romney budget proposals models and analyzes projected macroeconomic impacts of the candidates’ respective budget plans over calendar years 2013 and 2014, relative to current budget policies. The verdict:
- The budget plans put forward by Obama would lead to increased employment of 1.1 million jobs in 2013 and 280,000 jobs in 2014, relative to current policy.
- The budget plans put forward by Romney would lead to small job gains of 87,000 in 2013 and a loss of 641,000 jobs in 2014, relative to current policy, if his proposed tax cuts are fully deficit-financed.
- If Romney’s proposed individual income tax cuts and AMT elimination are revenue-neutral (he has said that they would be, but has not specified what base-broadening adjustments he would make to the tax code to accomplish that), his plans would instead lead to employment losses of 608,000 in 2013 and roughly 1.3 million in 2014.
Net near-term impact of Obama and Romney tax and budget policies on total nonfarm payroll employment (thousands of jobs)
Note: This figure presents the impact in calendar years 2013 and 2014.
Source: Authors' analysis of Congressional Budget Office, Office of Management and Budget, Romney for President, Tax Policy Center, and Moody's Analytics data
There are two major takeaways driving these results. First, government spending on infrastructure, aid to state governments, and safety net supports are highly cost-effective ways to boost aggregate demand and employment. Conversely, cutting government spending in today’s economic environment is highly damaging (Exhibit A: the U.K.), as spending is particularly stimulative in a depressed economy. Second, tax cuts—particularly those targeted toward corporations and upper-income households—are highly inefficient at spurring growth. Consequently, coupling high bang-per-buck spending with low bang-per-buck upper-income tax increases is a recipe for job growth (e.g., Obama), whereas regressive tax cuts coupled with government spending cuts will retard growth (e.g., Romney). When push comes to shove, the Obama employment gains would be driven by an increase of $135 billion in spending over the policy baseline, which is the result of $142 billion in temporary spending under his proposed AJA. The weaker job growth and outright job losses under the Romney plan are the result of his proposal to cap government spending, a move that implies very large cuts to overall spending (more than $250 billion in net cuts over the next two years in on our modeling).
The AJA is cost-effective stimulus, and the labor market would be noticeably stronger if most of the proposals had not stalled in the House of Representatives. We estimate the scaled-back versions of the only two AJA provisions to make it through Congress—emergency unemployment benefits and the payroll tax cut—are boosting real GDP growth by roughly 0.9 percentage points and boosting employment by 1.5 million jobs in 2012. As former President Bill Clinton accurately noted in Charlotte, full passage of the AJA would have boosted employment by another million jobs this year—over 1.6 million jobs by our calculations. Relatedly, the current policy baseline used in analyzing the candidates’ respective plans involves considerable fiscal contraction—much of the “fiscal obstacle course,” notably expiration of ad hoc stimulus and tightening discretionary spending caps, would impede growth in 2013 under the current policy baseline.
Lastly, it’s worth noting that under either assumption about the financing of income tax rate cuts and AMT elimination, the Romney budget would actually lose jobs over the next two years while adding substantially to the deficit—between $135 billion and $680 billion over two years—relative to current policies. This is a truly terrible tradeoff. (His tax cuts would add $7.1 trillion to the national debt before embarking on any spending cuts or base-broadening: we calculate that Romney’s budget would, by the end of the decade, push public debt as a share of GDP somewhere between 80 percent and 94 percent, depending on how much “base-broadening” is achieved, to Obama’s 73 percent.) Obama’s budget proposals would add slightly to the deficit—$5 billion over two years—but boost employment in both years, relative to current policy. This is not to suggest that economic stimulus should necessarily be “paid for.” Deficit-financed fiscal expansion remains the most direct policy lever for boosting employment—and we’re nowhere near the limits of effective fiscal stimulus. That said, any long-term deficit reduction should be of the least harmful variety, such as clawing back recent estate tax cuts or the upper-income Bush tax cuts (the exact opposite of the tack taken in resolving last summer’s debt ceiling hostage taking). If either candidate wanted to do more to improve the labor market, more deficit-financed, cost-effective stimulus is the way to go.