Commentary | Jobs and Unemployment

Recovery plan creates millions of jobs by any estimate

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Recovery plan would create jobs, lower unemployment

The Obama transition team recently released a report estimating the impact of the President Elect’s Recovery and Reinvestment program.[1] The analysis by economic advisers Jared Bernstein and Christina Romer suggested that a 2-year $775 billion recovery package would create 3.7 million jobs by the end of 2010. These jobs would be spread throughout the economy with over 90 percent of jobs created in the private sector.

Recent analysis by EPI suggests a similar impact of theprogram. Our preliminary analysis suggests that a $775 billion program would likely create approximately 5 million jobs.[2] Both estimates are built using similar economic models; however, slight differences in assumptions–including impact multipliers, underlying assumptions about the evolution of GDP, and the assumed composition of the package–would account for the differences between the two figures. Given the uncertainties involved in this kindof estimation, we view our estimates to be roughly consistent with the estimates from the Obama team. As further details emerge on the plan, we anticipate refining our estimates.

Both estimates trace the impact of spending and tax cuts by first determining the impact of stimulus on final output, and then use historical relationships between output and employment to find the impact on jobs. The Bernstein/Romer analysis uses spendingand tax multipliers from “a leading forecasting firm” as well as the Federal Reserve’s FRB/US model, with some adjustments for certain elements. The eventual output impact of government purchases in their analysis is approximately 1.5 for a 1 percent stimulus; individual tax cuts provide about a 1 for 1 increase, while tax-related investment incentives for business is about 1/4 the government spending impact in the short-run. The EPI estimates use multipliers derived by Mark Zandi for various kinds of stimulus.[3] These multipliers range from 1.73 for an increase in food stamps, to 0.25 for accelerated depreciation provisions for businesses. The EPI analysis assumes about $300 billion is in the form of tax cuts, with half of that for business; about $200 billion for aid to state governments; about $160 billion over 2 years for infrastructure; and the remainder is for unemployment insurance and assistance to low-income consumers.

Since tax cuts generally, and certain kinds of tax cuts for businesses in particular, tend to have a smaller per-dollar impact on gross domestic product than does direct spending, differences in assumptions about the size of tax cuts vs. spending increases will impact final job creation estimates. For example, our estimates suggest that reallocating $100 billion in business-related tax provisions (such as accelerated depreciation allowances or cuts in corporate taxes) to other recovery components could lead to approximately an additional 600,000 jobs, for a total employment increase of 5.6 million over 2 years.

With unemployment expected to reach over 10 percent in the absence of a recovery package, these additional jobs would be most welcome, lowering unemployment rates by approximately 3 percentage points. However, evenwith these new jobs, the unemployment rate would still likely remain around 7 percent, even after 2 years. Thus,expanding the package beyond its current size would seem appropriate.

[1] C.Romer and J. Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan” January 9, 2009, at http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf

[2] J.Irons and L. Mishel, “Call for urgent action is justified by economic trends” January 2009, at http://www.epi.org/analysis_and_opinion/entry/how_bad_could_it_get/

[3] M.Zandi. Written Testimony Before the U.S. Senate Budget Committee “The Economic Outlook and Stimulus Options” November 19, 2008, at http://www.economy.com/mark-zandi/documents/Senate_Budget_Committee_11_19_08.pdf

See more work by John Irons