Generating growth and jobs: a stimulus plan for 2003

by Lawrence Mishel

There is little question that the U.S. economy needs government action to stimulate job creation in what has been, so far, a "jobless recovery." Without action, the modest economic growth projected for next year will be too little to stop unemployment from staying at or above 6.0% in 2003, as Jared Bernstein shows in EPI's November 27 Economic Snapshot.

The year 2000 showed that U.S. unemployment can be pushed down to 4.0% without causing inflation, and our national economic policy should reflect that fact. The goal now should be to accelerate growth and move the economy back to a 4.0% unemployment rate and the broad-based prosperity that would follow. The challenge is to devise a stimulus plan that is (i) effective, (ii) avoids undermining the nation's long-term fiscal health, (iii) is timely, (iv) is fair, and (v) addresses unmet needs.

Many of the policies being discussed by the Bush Administration and others fail to meet these criteria. In contrast, the following proposed stimulus plan meets all five criteria and would generate growth amounting to an additional 2.0% of GDP in 2003, creating 1.5 million jobs and lowering unemployment by an entire percentage point. Note that more goes to temporary spending than to temporary tax rebates, because the latter have less "stimulative" effect due to some "leakage" to savings and import purchases:

• One-time spending of $110 billion in the following areas: first, $50 billion in grants to state governments to offset their financial crises and preserve health, education, law enforcement and other critical services (without these grants, state governments will be closing the $70 billion budget hole they currently have, effectively slowing the nation's economic growth by more than half a percentage point of GDP); second, school repair and renovation totaling $25 billion, to be accomplished quickly through existing programs; third, $25 billion in spending through a federal extension of unemployment benefits for the long-term unemployed, along with expanded eligibility for those who are currently ineligible due to having worked only part-time or for low wages in the months preceding their unemployment (this measure will quickly buttress consumer spending while helping those hurt by the recession); and last, other temporary spending measures totaling $10 billion.
  
• One-time tax rebates worth $65 billion that would benefit 149 million workers: a worker who earned $15,000 or more in 2002 would receive a $525 rebate, while those who earned less would receive 3.5% of their wages. Thus, a family with two workers earning $15,000 each would receive $1050.

Whether or not a stimulus plan includes the exact measures proposed above, care should be taken to ensure that any plan is effective, fiscally prudent, takes effect fast, is fair, and addresses unmet needs. There are unfortunately abundant examples of policies that violate these criteria but nevertheless are being proposed.

Supply-side measures aimed at increasing productive capacity (via interest rate cuts, business investment incentives or "dividend relief," for example) will be ineffective because there is already substantial unused productive capacity in the economy: the Federal Reserve Board estimates current capacity utilization is only at about 75%. And as Christian Weller shows in EPI's January 16, 2002, Economic Snapshot, businesses already have sufficient cash resources to expand production if they want to do so. They will not, however, until they begin to expect higher consumer demand. It is customers that are missing.

Meanwhile, any stimulus plan involving permanent rather than temporary spending or tax cuts unnecessarily harms the government's future fiscal position. Such long-term measures are not truly designed to create jobs in 2003. Since the purpose of any good stimulus package is only to get the economy rolling again so the private sector can play its role restoring growth, permanent measures are inappropriate.

Also, a good stimulus plan should take effect immediately, to create more jobs in 2003. This excludes trade expansion through yet-to-be-negotiated agreements, further deregulation of industry, or changes in tax policy that take effect years from now. Whatever their merits, these policies have nothing to do with the job creation needed now.

A good plan also should have fair effects. The United States has a more unequal distribution of income than any other advanced country in the world. A stimulus plan should avoid exacerbating income inequality and, wherever possible, act to lessen it. In fact, where tax cuts are concerned, those directed at the wealthy will not be as effective as those directed at low- and middle-income households, which tend to devote a larger share of any extra income to spending.

Finally, the new but temporary spending that must be part of any effective stimulus plan should be used to address important unmet needs. For example, there is a widely acknowledged backlog of badly needed school repairs. Other unmet needs that could be addressed include funding for superfund cleanup programs and sewage-treatment plant construction.

Return to the Winter 2003 EPI Journal