The unemployment rate, currently above 9 percent, is projected to remain high for a long time. For example, the current Blue Chip Economic Indicators consensus forecast puts the average unemployment rate for 2012 at 8.3 percent. The agreement to raise the debt ceiling just announced by policymakers in Washington not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs. The spending cuts in 2012 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012, relative to current budget policy.
The agreement would reduce spending by at least $1 trillion over 10 years through budget caps on non-mandatory programs, with additional reductions under discussion in a second phase. While the bulk of the cuts are back-loaded – coming more in the future – the near-term cuts would still have an immediate impact. Applying conventional multipliers, the reduction of $30.5 billion in calendar year 2012 would reduce GDP by 0.3%, and result in roughly 323,000 fewer jobs (as depicted in the table below).
In addition to the immediate cuts to spending, the debt ceiling agreement fails to continue two major policies which had been part of broad agreements in the past. The payroll tax holiday and extended unemployment insurance were passed last December along with the two-year extension of the Bush-era tax cuts; but are set to expire at the end of 2011. While Congress could still extend these policies between now and the end of the year, that scenario is looking much less likely today. (Any economic support subsequent to this deal would have to be offset by other tax increases or spending cuts in 2012 or a further increase in the debt ceiling, neither of which seems politically viable.)
The payroll tax holiday reduced the Social Security payroll tax for all workers by two percentage points. Extending that tax cut for another year would provide roughly $118 billion in stimulus through increases in employees’ take-home pay, which would boost economic activity by an even greater $128 billion. Allowing this policy to expire would lower GDP by 0.8% in 2012, and would lead to roughly 972,000 fewer jobs. It should be noted that while the payroll holiday creates jobs, there are more effective ways to target tax policy to those most likely to spend the extra income, creating an even bigger bang-for-the-buck without some of the negative side-effects. (See Fieldhouse 2011.)
The continuation of unemployment insurance benefits to long-term unemployed workers (up to 99 weeks of benefits) is also set to expire at the end of the year. Allowing that provision to expire on schedule would mean $45 billion less in assistance to unemployed workers, and $70 billion less in economic activity (unemployment insurance has one of the largest bang-per-buck of any job-creation policy). That reduction in purchasing power would lower GDP by 0.4%, and mean roughly 528,000 fewer jobs. Approximately 3.8 million Americans currently receive unemployment insurance because of this program; failure to continue these emergency benefits would put an additional drag on the economy.
If Congress fails to renew these existing programs or enact improved versions, we can expect slower growth, fewer jobs, and higher unemployment. Specifically, there could be 1.8 million fewer jobs and a 0.6 percentage point increase in the unemployment rate in 2012 as a result of abandoning current budget policies. The national unemployment rate would average closer to 9% instead of trending toward 8%, as projected by the Blue Chip consensus forecast. This means little relief for the 14 million people who are currently unemployed or the many millions more who are underemployed. Roughly one in three workers will be unemployed or underemployed in 2011 and there would be little progress on this front in 2012. This persistent high unemployment not only creates great economic distress for those families directly impacted but also undermines wage growth and continues the erosion of benefits of those still employed. Moreover, these high levels of unemployment make it more difficult to face our fiscal challenges over the long run.