What Washington Should Do to Create Jobs

by Rob Shapiro | October 8, 2009


Policymakers and pundits who finally are worried about a "jobless recovery" should consider this: Our actual prospects are worse than that term suggests.   The initial expansion we may already be experiencing will be notable not for a lack of new jobs, as the phrase "jobless recovery" suggests, but for substantial, continued job losses.   Total employment will continue to decline for many months and perhaps as long as two years, as it did after the 2001 recession.   Nor will it be enough to aim for simply "recovery," if by that is meant a return to the conditions that preceded this recession, including unstable capital markets and stagnating real wages in the face of strong productivity gains.

The stimulus passed last February has helped to slow job losses--without it, we might well shed an additional one-to-two million more jobs.   But fiscal stimulus is a much weaker lever for creating jobs than it used to be, because of changes in the relationship between increases in economic demand (that’s what stimulus does) and creating new jobs to satisfy that demand.   In the 2002-2007 expansion, private employment grew at less than half the rate, relative to growth, as it did in the expansions of the 1980s and 1990s. So, Washington boosting demand and growth today has less than half the impact on jobs that it once did.

In the short-run, there’s little we can do about this change. Behind it lies large, structural changes, especially the emergence of more intense competition spurred by globalization, which now limits how much businesses can raise their prices when their costs increase. The good news about this development is the low inflation that’s prevailed across most of the world for nearly two decades, or basically the time frame of modern globalization.   The bad news is that when health care and energy costs, for example, rise rapidly, businesses which can’t pass along those cost increases in higher prices have to cut other costs--and they often start with jobs and wages. (These developments are also big factors in why wages now stagnate even as productivity increases.)

This means that the administration’s long-term economic agenda has to include serious steps to reduce how much health care and energy prices rise, or relieve business of some of the burden of those cost increases. In short, long-term cost containment in health care and the development of alternative energy sources on a large scale both have to be part of the administration’s core economic agenda, with all of the political urgency that implies. Otherwise--and here’s a scary thought--most Americans may fare no better economically under President Obama than they did under his failed predecessor.

There are still a few cards left to play for the shorter-term.   The most important jobs measure in the February stimulus was assistance to the states (and through them, to localities), so their own budget squeezes don’t force them to lay off so many teachers, police, and other public employees.   Their budget constraints are still growing worse--an important part, because unemployment is still rising. The most efficient way for Congress and the President to limit additional jobs losses in 2010, then, is to provide perhaps another $100 billion in assistance to the states.

The other measure now getting attention is a tax break for businesses that create new jobs, an idea the President promoted in his campaign but which never made it into the stimulus. Here’s how it works: Businesses would receive a tax credit for the first year of payroll taxes on new employees or those moving from part-time to full-time, and a credit for half as much in the second year. It’s not very well targeted, since you end up subsidizing jobs that would have been created without any tax break.   (Keep in mind, falling employment is a net result, with some businesses adding jobs and others cutting them.) But it is well focused on jobs, so long as we also include some conditions on those who claim it. For example, a new business should have to be in place for at least six months before qualifying, to head off scams where people close down existing firms, reopen them, and then use all their existing employees to claim a big tax benefit. And a firm’s total wage costs should have to rise, so employers don’t just fire and rehire workers in order to qualify.

We tried a version of this tax break in the 1970s, and most economists who’ve looked at it believe it did some good. It should help again--but not as much as it did last time, because the economy’s natural, job-creating dynamics are much weaker and more constrained under globalization than they were in the 1970s.

Beyond these two measures, the most important step for the administration is to set its political sights on the more difficult, long-term measures required to restore healthy and sustained job creation and wage gains--and to prepare the American people to wait a while for real results.


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