Report | Budget Taxes and Public Investment

Abandoning what works (and most other things, too): Expansionary fiscal policy is still the best tool for boosting jobs

Briefing Paper #304

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If the policies in Washington matched the rhetoric about job creation, Americans could rest easy about the economy for the next couple of years. Advocates on every side of nearly all current debates make strong claims about whether a given policy will “create” or “destroy” jobs. Given these conflicting claims regarding identical policies, it is hardly surprising that Americans seem truly confused about what textbook economics actually predicts could lower today’s too-high unemployment rate.

These predictions are surprisingly straightforward: Only policies that boost the overall demand for goods and services in the economy will significantly lower unemployment in the near-term. The best way to boost this demand is doing more of the effective parts of the American Recovery and Reinvestment Act (ARRA). This reality is frustrating to most people—they want something new and different that can be invoked to solve the unemployment crisis. According to a New York Times magazine story from earlier this year, this frustration even extends to President Obama, who reportedly chastised his economic team at the end of 2010 for not bringing him newer and more exciting job-creation ideas.

Politically, this is understandable—the ARRA is not the most popular piece of legislation with a public that remains quite divided about its effectiveness.1 But politics aside, the economics are clear: There are not many new and exciting policy levers that can be pulled by Congress and the president to solve today’s unemployment crisis. Fortunately, the old (and presumably boring) policy levers could reduce unemployment much more quickly if applied with enough force.

If we do indeed ease up on efforts to boost demand and jobs after (or even before) the end of this fiscal year, then we will surely consign ourselves to years of unemployment that is higher than it has to be. This is not just a human tragedy (though it surely is that), but it is also a huge economic waste. If, for example, we could use fiscal policy to shave a percentage point off the unemployment rate forecasted by the Congressional Budget Office (CBO) each year between 2012 and 2015, we would cumulatively add roughly a trillion dollars to gross domestic product (GDP, a measure of all production and income in the U.S. economy) over those four years—or about $3,000 per man, woman and child in the United States.