To hear the punditry tell it, the priority Washington has given to deficit reduction over job creation reflects an ideological revolt from the grass roots against big government.  Yet, listening to such Tea Party ravings as “Keep the Government’s hands off Medicare” hardly suggests the presence of deep thinking about political philosophy. Moreover, the polls don’t show much division on the deficit/jobs question at all. Majorities think that the government should put the unemployed to work by investing in infrastructure and education and should get the money by taxing the rich.

So why the gap between what the people prefer and what their elected representatives are doing? The answer is money, which ironically is rarely mentioned by the talking heads and columnists who instruct the public about economic policy. I’m not talking about the money supply, here. I’m talking about the money that the typical politician spends 75 percent of his or her time raising for the next election.

The present quasi-lunatic state of our political debate is no accident. It is the inevitable product of the large amounts invested by corporate America in politicians who promote its interest in government de-regulation and low taxes. In 2010, for example, Tea Party- connected candidates received at least $20 million in contributions from Wall Street and the U.S. Chamber of Commerce.

Why? After having been rescued from the consequences of their own greed and folly by President Obama, Wall Street is now outraged at the modest restraints put on their recklessness by the Dodd-Frank Bill, and any hint that they might be asked to pay a little more in taxes to help pay for the economic damage they have done.

With last year’s Supreme Court’s Citizen United decision, economic policy will be even more hostage to campaign spending by the rich and powerful. My own view is that public financing of campaigns has not worked. So Progressives need to directly attack the Supreme Court ruling by organizing a movement for a constitutional amendment aimed at controlling money in politics. The opportunity for educating the public on how their government really works alone would make the effort worthwhile.

Pie in the sky? Maybe. But it is even more naïve to think that we will ever have an economy that works for working people if the interests that are sucking our economy dry continue to choose the policymakers.

President Obama’s jobs plan, if implemented, would boost employment by around 4.3 million jobs (yes, 1.6 million of those jobs would come from continuing temporary policies that are already in place and supporting the economy today, but the new initiatives alone would generate 2.6 million jobs).

How do we judge such large figures? Here’s a benchmark: right now the gap in the U.S. labor market is around 11 million jobs when you take into account both the number of jobs we are down since the start of the recession and the number we should have gained to keep up with normal growth in the working-age population. Eleven million is the number of jobs we need — and Obama has just proposed a plan that could take a big bite out of that gap.  This plan is a vital step in the direction of providing a solution that matches the scale of the ongoing crisis.

Tonight, President Obama outlined a set of measures that would create jobs. Here’s a quick look at the impact on employment over the next couple of years.

The table below shows a preliminary breakdown of the package and a first pass look at the job impact (we’ll revise and update as more details are released). The plan includes $162 billion for the continuation of the payroll tax holiday and extended unemployment insurance benefits, and $285 billion for other new measures, including the expansion of the payroll holiday (to a 3.1 percentage point reduction and to employers), infrastructure investments, aid to states and localities, school construction, etc.

Overall the package would increase employment by about 4.3 million jobs over the next couple of years. The new initiatives would boost employment by about 2.6 million jobs, while the continuation of the two temporary provisions (EUI and the payroll tax holiday) would prevent a backslide of over 1.6 million jobs.

There’s still a big hole left to fill, but every step matters.

Note: The above analysis is a quick first approximation, and notably does not include a full accounting of the macroeconomic dynamics of fiscal policy, GDP, employment, etc. In particular, the 2012 impulse may take longer to ramp up for some kinds of investments and will last longer into 2013 than what is noted in the table. However, when private and government forecasters fire up their models (e.g. Moody’s, CBO, etc), they will very likely find similar results. Multipliers are from Moody’s/Zandi.

Earlier today and in our recent paperwe laid out some criteria for assessing a jobs plan. So, how did President Obama do by our criteria? Very well, as the package provides a substantial boost to the economy in addition to continuing the important efforts already underway (providing unemployment compensation and the payroll tax holiday). The components of the plan are highly effective for the most part, including spending on various types of infrastructure, support for teachers and first responders, and a new jobs tax credit. So, it will be effective and at a scale that can really move the dial. The initial year (or more) will be deficit financed so the effort doesn’t take away with one hand what the other hand had already done—paying for the program in the out years of a 10-year period allows this. So, the plan does get high grades.

For more, see Ross Eisenbrey’s analysis of the good and bad parts of the plan and John Irons’ assessment of the plan’s impact on employment and unemployment.

Now to our four criteria outlined earlier…

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 sizable number of jobs be created within two years?” The answer is that the plan does set policies that will move the dial in the next year. First, the continuation (actually the expansion) of the employee payroll tax holiday and the current program of emergency unemployment compensation for the long-term unemployed prevents the loss of jobs. Second, there are new efforts that will boost spending and thereby generate jobs and lower unemployment: transportation infrastructure, the infrastructure bank, school repair and modernization, and funds for state/local governments to support teachers and first responders. This new spending amounts, we estimate, to as much as $125 billion, an amount that generates perhaps as much 1.5 million jobs. That certainly moves the dial. Third, the expansion of the employee-side payroll tax holiday and the new jobs tax credit (similar, we understand, to what EPI proposed back in 2009) will add more employment. Last, the proposal to provide a payroll tax holiday for employers on the first $5 million of payroll is not all that effective as I wrote earlier. However, some analysts  project that this would help generate jobs as well. Overall, this plan does provide a serious amount of investments and support for the economy above the continuation of the current effort (payroll tax holiday, unemployment compensation). Consequently, it will make a real difference over the next year or two.

Criterion two: Is the policy effective and efficient?

We said, “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.” This plan meets this criteria as it provides efforts that are very effective at generating jobs, including providing unemployment compensation, and improving infrastructure (roads, highways, schools). This part of the plan, thankfully, dominates the weaker efforts such as allowing accelerated depreciation for business or the employer-side tax holiday.

Criterion three: How is the policy funded?

We said, “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.”

We don’t have much details on the ‘pay fors’ but it seems that they will all kick in no sooner than 2013 and probably later than that. So, the plan is deficit neutral over 10 years but it does raise the deficit over the next years or so. AS IT SHOULD!

Criterion four: Is the policy at the appropriate scale to produce a substantial number of jobs?

We said, “In order to put a significant dent in unemployment and establish a fast trajectory toward low unemployment, the jobs plan must be sufficiently large.” This plan puts about $450 billion into the economy over the next years or so. That is substantially above the $167 billion needed to maintain the current effort (payroll tax holiday and unemployment compensation), so the plan provides a substantial boost.

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.

If policymakers’ effectiveness in alleviating joblessness matched their rhetorical commitment, we would live in a much happier country (and world). There is not an incumbent national politician in the country who doesn’t claim to be extremely concerned, even frantic, about the need to fight joblessness. Despite this, and despite claims that we’re just not sure what would really work to fight joblessness, the simple fact is that there are powerful policy levers that, if pulled, would rapidly lower the unemployment rate that are not being used.

Why policymakers are reluctant to use them is a pretty fascinating question that I hope to write more on (the essential place to start pondering this question is here), but today I’ll just sketch out the policy levers and make claims about the extent of their under-utilization – and this will alone make this far too long for a blog-post, so sorry about that.

These policy solutions are all premised on the belief that the problems facing the economy today stem from the failure of businesses, households, and government to spend enough money to keep all workers that want a job employed. When the $8 trillion bubble in housing popped, the construction activity and consumer spending associated with it left a gaping hole in overall demand for goods and services that has not yet been filled.

There are basically three policy levers that can be used to help fill this shortfall in demand: fiscal, monetary, and exchange-rate policies. None of them are close to being maxed-out and some are going in precisely the wrong direction one would want if fighting joblessness was actually your top priority. Most strangely, the prevailing conventional wisdom is that it is politically unrealistic indeed – downright naïve, in fact – to call for these levers to be pulled with real force and reduce joblessness. What most voters don’t (but need to) know is that this rock-solid conventional wisdom is utterly at odds with textbook macroeconomics – in fact it’s essentially economic flat-earthism. And yet it’s powerful enough to keep policymakers inert while millions of Americans remain unemployed.

Given that jobs is the topic dominating media coverage this week, here is a quick overview for deciding whether or not a policymaker is genuinely concerned about joblessness or just playing such a concerned policymaker on TV. If they’re really devoted to ending joblessness, they will be talking about these policy levers and how they should be pulled.

Fiscal policy: When business and household spending craters, government spending (and, generally less-effectively, tax cuts) can and should increase to stem the private declines. How much fiscal support should be provided to today’s economy? Currently, the “output gap” is roughly $1 trillion – meaning that this much additional aggregate demand is needed to soak up the resources idled during the recession.

Assuming a reasonable multiplier makes it clear that the economy could absorb at least $600 billion in additional fiscal support in the coming year before it came close to returning to pre-recession unemployment rates. Now, of course this isn’t politically realistic, and that’s a real problem because fiscal support is the lever most guaranteed to work and with sufficient scale to fully solve the jobs-crisis.

This said, policymakers who were genuinely frantic about the problem of joblessness would be talking about the need for more fiscal support and talking on a similar scale. Such policymakers do exist!

Needless to say, policymakers truly frantic about fighting joblessness wouldn’t be slashing at spending in the near-term, or stressing the need for government to “tighten its belt” the way cash-strapped families need to.

Monetary policy:  Normally as the economy enters recession, the Federal Reserve lowers the short-term interest rates that it directly controls. By doing this, they hope to put downward pressure on the longer-term rates that influence business investment in plant and equipment and household spending on big-ticket items like durables and housing. These short-term rates currently sit at (essentially) zero. So it is too often said that the Federal Reserve has “run out of ammunition.”

This is not so. There are a range of things that could still be done. They could launch another round of “large-scale asset purchases” – buying longer-term debt to directly target the interest rates that influence business investment and consumer spending. And they could launch it on a scale that would actually move the economy. They could announce a higher inflation target to provide confidence to households burdened by large debt overhangs that these burdens would lighten over time.

Policymakers who thought this aggressive approach to fighting joblessness was warranted could do more than just call for it (though even that would be a bold act in today’s “realistic” climate) – they could also agitate for the appointment of unemployment hawks to the two vacancies in the Federal Reserve Board of Governors – including recess appointments if confirmation of these unemployment hawks was held up by the Senate. Such talk would, of course, bring stern lectures from purveyors of conventional wisdom about the danger of threatening “central bank independence” – but in fact there is no central bank independence in the current system, there is only insulation from stakeholders that are not the finance sector.

What policymakers not particularly concerned about joblessness will do is complain that the Fed is overreached or has laid the ground for runaway inflation.

Exchange-rate policy: The Swiss government announced this week that too many investors fleeing Euro-denominated assets had begun demanding Franc-denominated ones; the increased demand for Francs pushed up the Swiss currency and made it too expensive for Swiss products to compete on global markets. They vowed to fight this development with the policy tools they had available.

What’s this have to do with us? Well, the U.S. dollar has been over-valued (and continues to be) for years – and remedying this over-valuation in the next couple of years could boost our net exports and jobs. And the overvaluation of the U.S. dollar (unlike that of the Franc) is actually not a case of markets getting panicked – it stems instead from the policy decisions of major trading partners (China, in particular) to keep their own currencies from rising against the dollar by buying hundreds of billions of dollars of U.S. assets. In short, the over-valuation of the dollar is now almost entirely driven by policy – so the remedy should be, too.

Such a revaluation of the Chinese currency against the dollar would essentially take aggregate demand from the Chinese economy and give it to U.S. economy. This might sound somehow unfair at first blush, but it turns out that the U.S. needs this demand and China doesn’t. In fact, China in the past year has actually begun raising domestic interest rates and restricting credit to choke off too-rapid demand growth in their economy.

So what would policymakers frantic about joblessness call for in terms of engineering a revaluation of currencies that are pegged too low against the dollar? Take your pick. But they surely would be doing something ; or at the very least something besides saying that a strong dollar is good for the United States.

As we watch President Obama’s speech and Congress’ response, ask yourself if this looks like a group of policymakers who are genuinely frantic about fighting joblessness. If the answer’s ‘yes’, that will be a huge improvement.

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.

One never knows how much to make of reports claiming to know what will be in the president’s jobs package. Some of them, like this Bloomberg story are saying that the president may propose a holiday on the employer side of the payroll tax in addition to continuing the 2 percent payroll tax holiday on what employees pay.

The Bloomberg story says, “Almost half the stimulus would come from tax cuts, which include an extension of a two percentage point reduction in the payroll tax paid by workers due to expire Dec. 31 and a new decrease in the portion of the tax paid by employers.”

An employer-side payroll tax holiday does not make sense on either economic or political terms and should not be pursued. We need jobs, so how does giving an employer a rebate on payroll taxes help? Since the rebate is on taxes paid for all workers, which is primarily current workers and not newly hired workers, this short-term, temporary policy amounts to just giving employers cash for doing what they do now, i.e., for doing nothing. Now, firms already have a ton of cash, as the Wall Street Journal recently reported:

“Non-financial companies in the Standard & Poor’s 500-stock index were holding $1.12 trillion in cash and short-term investments in their most recent reports, up 59% from $703 billion in the third quarter of 2008. Those stockpiles are providing companies with a cushion of comfort amid the economic and market turmoil.”

In fact, isn’t that how the problem is frequently stated, that firms have a lot of cash but are not investing or hiring? So, giving them more cash doesn’t solve that problem, right? Maybe some people think a payroll tax holiday for employers works by lowering the costs of hiring new workers. If so, then it would not make sense at all to lower the taxes paid for workers already employed, a clear waste of money. That is why some people, including yours truly, have noted that lower taxes for employers should only result when employers add more workers than they already have, such as in a new jobs tax credit (see this EPI briefing paper). This policy has some serious leakage, too, as many firms would be adding employment anyway, but the overall impact is cost-effective and could encourage hiring now rather than later.

It is worth noting that providing a payroll tax holiday on the employee side has a totally different economic rationale and one that makes sense. Basically, less payroll taxes paid means a fatter weekly take-home paycheck which, in turn, means households will be spending more. This boosts the overall demand for goods and services and generates jobs throughout the economy. In 2011 the payroll tax holiday boosted spending enough to offset the negative impact of higher fuel prices on family budgets.

What about the politics? One can understand that conservatives might want to have a payroll tax holiday on the employer-side since, let’s face it, they like to give cash to corporations. So, why should President Obama propose this? Let the political opposition make that proposal. Then again, I haven’t frequently understood the theory underlying the president’s tactics in policy negotiations or how bargaining with yourself pays off in better policy or more political support.

The Super Committee formed by Congress and the administration as a result of last month’s debt ceiling debacle is holding its first public hearing today. The committee’s 12 members were given a chance to state their opening remarks on fiscal policy and deficit reduction, and heard testimony from Congressional Budget Office head Doug Elmendorf. One of the congressmen on the committee, Rep. James Clyburn (D-S.C.), stated that his constituents – who face an unemployment rate over the 9.1 percent national average – were less interested in hearing about deficits from Congress and more interested in hearing about job creation.

As the Super Committee dives into their work this month, a handful of congressmen are actually more concerned with putting America’s 14 million unemployed back to work. After all, we have a jobs shortfall of no less than 11 million to fill. Representative Keith Ellison (D-Minn.), who previously proposed the “Put America to Work Act,” which would provide cities, states, and Native American tribes with $350 billion in grants over the next two fiscal years, yesterday introduced the “Emergency Jobs Act Now.” This bill would require the Super Committee to create at least 3 million jobs over 2012-2013. It provides the committee with a mandate to create jobs in addition to its charge of reducing deficits by $1.5 trillion over 2014-2021.

Though the bill does not offer specifics for job creation, it is important in that it sets a deadline for the Super Committee to vote on proposed emergency jobs legislation. It also strikes the budget caps for fiscal years 2012 and 2013 put in place by the Budget Control Act, (aka the debt ceiling bill) in order to allow for this emergency jobs legislation to make its way past budgetary restrictions. This is an important bill for Congress to consider, particularly as President Obama moves to address the nation on job creation measures tonight.

Missed this when it came out, but Harvard economist Lawrence Katz published a jobs-proposal in the New York Times this past Tuesday that actually matches the scale of our jobs problem. Would I spend the money exactly the way he does to create jobs? Probably not. But, his proposed new jobs tax credit is much bigger than most others I’ve seen and calling for “at least several hundred billion dollars a year” in infrastructure spending for the next two years is, well, really serious. But, the plan is so naïve in the current political moment – he must not know anything about policymaking.

And, missed this too, but Paul Krugman makes the point that environmental regulations that incentivize businesses to undertake investments needed to meet their requirements can actually create jobs when the economy has lots of unemployed workers.

It’s a brilliant point, especially the ‘broken windows fallacy’ part. Of course I would think that – I made the same point (with the same ‘broken windows fallacy’ pooh-poohing) here. This paper found that the EPA’s “toxics rule” would create on the order of 100,000 jobs between now and 2015. Of course, the primary reason to enforce such regulations is not job-creation – that’s just a happy side-benefit during times of excess capacity – instead it’s the incredibly high benefit/cost ratio generally. But the jobs-terrain is where most opponents of regulations go, and, it’s wrong.