How to assess a jobs plan
Getting ready to watch President Obama present his jobs plan? As you gather the snacks, keep the following scorecard handy to judge this program, and any others you happen upon. We laid out some criteria recently and they are worth reviewing again.
Criterion one: Will the policy make a real difference in job creation in the next 24 months?
The first question that should be asked about a jobs plan is, “Will a sizeable number of jobs be created within two years?” The recessionary labor market has already persisted for three-and-a-half years, and the need to get the unemployment rate on a steep downward trajectory is obvious. Since robust job growth should extend beyond the next 24 months, we should also ask whether a plan will ensure sufficient economic growth to drive steep declines in unemployment beyond 2013.
This criterion is important because some policies already suggested by Congress and the administration will generate jobs too slowly, with little or no impact in the near term—think trade treaties, patent reform, corporate tax reform and so on that might never have much impact on jobs and certainly will not move the dial in the next two years.
Criterion two: Is the policy effective and efficient?
A jobs plan should be an effective use of resources so that each billion dollars in either expenditures or lost revenue generates more jobs than alternative plans. Simply put, some policies offer more bang for the buck. We know from the Congressional Budget Office, academic experts, and private-sector forecasters (Elmendorf 2010; CBO 2011; and Mark Zandi 2010, 2011) what the most effective policy tools for generating jobs are. Generally, tax cuts are weaker than spending to generate jobs and spending on low and moderate income people generates the most jobs (see the appendix of this recent EPI briefing paper for a comparison of the cost effectiveness of various proposed job creation policies).
Criterion three: How is the policy funded?
The most effective job creation policies cannot be “paid for” by higher taxes or other spending cuts in the near term. Effective jobs policy injects money into the economy and increases the overall demand for goods and services, thereby raising the need for more workers to produce those goods and services.
But if a job creation policy must be “budget neutral”—that is, it must be accompanied by a tax increase or budget cut—then the benefits of the spending injected in the economy are diluted at best. So, an effective jobs plan should either be deficit financed or paid for in later years only after the economy is much stronger and has much lower unemployment.
Criterion four: Is the policy at the appropriate scale to produce a substantial number of jobs?
In order to put a significant dent in unemployment and establish a fast trajectory toward low unemployment, the jobs plan must be sufficiently large. As of the second quarter of 2011, the output gap—the shortfall between actual and potential gross domestic product—stood at $1.0 trillion (-6.3 percent), having narrowed from a peak of $1.2 trillion (-8.2 percent) in the second quarter of 2010 as a result of the American Reinvestment and Recovery Act (Fieldhouse 2011). Halving the output gap would require more than $350 billion in additional fiscal support for this year alone; this is in addition to maintaining current budget policy, including the payroll tax holiday, emergency unemployment benefits, discretionary spending levels, and transportation investments.
Proponents of jobs plans should set clear goals regarding the extent to which unemployment will be reduced over the next two years. While the first three criteria can be used to evaluate individual job creation policies in isolation, this final criterion of scale should be applied instead to a package of job creation policies.