BUSINESS
04/14/2010 05:12 am ET | Updated May 25, 2011

Is Obama Doing Enough To Create Jobs?

Even as one in 10 Americans remain unable to find work and President Obama has established job creation as his "number one focus" this year, the legislative proposals being seriously discussed in Washington don't even come close to addressing the problem, according to some leading economists.

Among the White House's proposals is a payroll tax holiday to incentivize firms to hire more workers. Two competing ideas, one from Senators Bob Casey Jr. (D-Pa.) and Kirsten Gillibrand (D-N.Y.) and another from Senators Charles Schumer (D-N.Y.) and Orrin Hatch (R-Utah), propose similar plans but with small differences in detail. The latter is expected to be introduced in legislation the week after next by Senate Majority Leader Harry Reid (D-Nev.).

But the consensus among many economists is that what's really needed are public works projects and major investments in infrastructure and education to create long-term, sustainable jobs.

Economists, including James K. Galbraith, Dean Baker, Joseph Stiglitz and Robert Reich, say the short-term moves being considered on Capitol Hill -- such as marginal tax credits and funds to boost lending to small businesses -- are likely to fizzle out. They're good ideas but they just don't go far enough to reverse the loss of more than 8 million jobs over the last two years.

Galbraith wants a government-created financing network that will lend money to businesses and industries which align with long-term U.S policy initiatives, like energy consumption and renewal. Extending unemployment benefits is also a good idea, Galbraith said, but it's a relief measure, not a job-creation one.

The economists also focus on the demand side of the economics equation. "Without adequate demand, small businesses can't sell their goods and services, and therefore won't hire," Robert Reich, an economist at the University of California at Berkeley and former Labor Secretary under President Bill Clinton, said in an interview. "Consumers won't have money in their pockets until the government primes the pump adequately through a larger stimulus that gets money out there right away."

A Friday editorial in the New York Times noted: "No matter what Congress does to lower the cost of labor, employers won't hire unless they believe demand will be sufficient to sell whatever the business produces."

There are about six unemployed workers for each available position, according to the Labor Department. In normal economic times, there is at most one unemployed worker per open position, notes Mark Zandi, chief economist for Moody's Economy.com.

Zandi expects the unemployment rate to hit 10.6 percent in the coming fall, nearly a full percentage point increase over the current rate. Goldman Sachs, arguably the leading firm on Wall Street, forecasts unemployment to average 10.3 percent this year and 10.7 percent in 2011. The Obama administration is a bit more optimistic. It said last week it expects unemployment to average 10 percent this year, and 9.2 percent next year.

Increasing demand will stimulate job growth, and the simplest way to do that is for the government to hire workers, either directly or through private contractors working on public projects.

"Direct public-service employment is straightforward. As long as the new government jobs do not compete with the private sector, the net job creation should be one-for-one," wrote Alan Blinder, a Princeton University economist and former Federal Reserve official, in a Nov. 15 op-ed for the Wall Street Journal. "So hire people to repair parks, not shopping malls. And if we restrict ourselves to low-wage jobs, the cost will not do grievous harm to the budget. For example, at an average all-in cost of $30,000 a year, one million new jobs would cost $30 billion."

After debating the benefits and costs of tax incentives versus government hiring, Blinder concluded: "The more I dwell on these things, the better direct public-service employment sounds."

During a Dec. 3 meeting on jobs at the White House, several participants discussed the benefits of the government directly hiring more workers, according to a summary report:

Another idea that came up several times, specifically mentioned by Alan Blinder, Anna Burger [secretary-treasurer of the Service Employees International Union], [Detroit] Mayor David Bing and Larry Mishel [president of the Economic Policy Institute], was public sector hiring, particularly by state and local governments. Anna Burger mentioned several possible tasks for new public employees, including home care and child care, park cleanup, infrastructure construction, and weatherization of public buildings. She also noted that jobs requiring little training could be created more quickly than those requiring specialized workers.

Zandi notes that increasing spending gives taxpayers more "bang for the buck" than tax cuts. For every additional $1 spent on infrastructure, the economy gets a $1.57 benefit. The only better deals for taxpayers are increased unemployment benefits, food stamps and a program that involves states shouldering a portion of private-sector salaries in exchange for those workers keeping their jobs.

Hiring more workers, though, means adding an expense to the government's balance sheet. While tax cuts for businesses will bring in less revenue, public sector hiring adds costs. Deficit hawks, ever mindful of increased government spending, would likely pounce on this.

Galbraith and his like-minded colleagues argue that now is not the time to worry about deficits.

"The valid complaints about fiscal policy over the past 14 months are not that it has run up the national debt and rewarded the princes of Wall Street, but rather that it has been too limited -- that we ought to have done more. Yet these policies are political losers now: nobody is proposing more stimulus," wrote J. Bradford DeLong, an economics professor at the University of California at Berkeley, in an op-ed on Project Syndicate.

Last year's $787 billion stimulus plan has widely been credited with averting disaster. DeLong argues that the lack of serious attention being given to a second robust stimulus "is strange, because usually when something works the natural impulse is to do it again. Good policies that are boosting production and employment without causing inflation ought to be politically popular, right?"

"Investing in our nation's infrastructure is one of the main pieces of President Obama's approach to job creation," an administration official wrote in an e-mail. "The administration has already invested over $80 billion in strengthening our nation's infrastructure, to create jobs and strengthen regional economies, through the Recovery Act. There's $48 billion in transportation infrastructure in the Recovery Act, including $8 billion to build a national high-speed rail network. In addition, the Recovery Act includes $3.4 billion in grants to private companies, utilities, manufacturers and cities to fund smart energy grid projects that will support tens of thousands of jobs and benefit consumers in 49 states.

"We're also investing $7 billion through the Recovery Act to bring broadband to communities where there is little or no access -- a significant step forward in driving local economic development. Some additional examples include investments of $6 billion in State Clean Water and Drinking Water Revolving Funds to rebuild the country's water infrastructure, $5.5 billion in General Services Administration federal buildings and $4 billion in the Department of Housing and Urban Development's Public Housing Capital Fund."

A little over a third of last year's stimulus (the Recovery Act) was allocated for federal contracts, grants and loans. The rest were for tax cuts and entitlement programs like unemployment benefits.

Rather than acknowledging advice to ramp up public works projects, Washington is trying to prove it's serious about reducing the deficit. That's part of the reason why tax cuts and incentives for businesses are such popular ideas, as opposed to major infrastructure spending.

Zandi recently wrote in support of such an idea.

"Despite all the uncertainty, a tax break stands the best chance among the proposals under consideration for ensuring the U.S. job machine kicks into full gear later this year," Zandi wrote Wednesday in an op-ed for Moody's Economy.com. "Such a program could be particularly effective if implemented by late spring. By then, firms will have had time to regain their confidence, and banks should be extending credit somewhat more freely."

Obama's payroll holiday proposal would create about 726,500 jobs -- the most of the three, Zandi wrote. It would cost about $33 billion up front, or about $45,500 per new worker. Based on the most recent employment figures, that addition of new workers would return the overall employment level to where it was in July, when the unemployment rate was 9.4 percent.

Also, taxpayers won't get as much "bang for the buck" as they would if the government hired more workers. A job tax credit nets a $1.30 benefit for every $1 in cost.

While the Obama administration has proposed a host of measures to stimulate job growth, like increasing the availability of credit for businesses, little is expected to go directly towards stimulating demand.

"To make the leap from recovery to expansion," the economy needs another $210 billion in fiscal stimulus over the next two years, said Zandi in January at an Urban Institute discussion.

"We have to turn the corner on the notion that this is just a pump that needs to be primed, an engine that needs to be restarted, something that can be kicked back into functioning form with a little extra federal spending," Galbraith said of stimulus plans. "We've actually done this twice -- first in the spring of 2008, and then we did [it] in the spring of 2009.

"It certainly didn't fail," he said of last year's stimulus. "We'd be much worse off without having done it. But the expectation that this is a sufficient measure for restarting sustained economic growth has been disappointing, and that's something we need to recognize."

In an interview, Jessica Milano, a senior fellow at the Democratic Leadership Council who recently wrote a report on job growth, said that the focus should be on long-term solutions that create sustainable jobs, rather than purely short-term stimulus.

"The argument is...we need to do something now, we need to do something in the short-term," she said. "I would argue what's good for the long-term is good for the country overall. So taking the longer approach and focusing on strategies that will increase investment, and not only create jobs but build a lasting infrastructure for the 21st century, has more value than the short-term stimulus-type policies." One example of a short-term fix is former President George W. Bush's 2001 tax cuts.

"That sort of stimulus, which is focused purely on consumption demand or improving consumer demand, might work in the very, very short-term. You might see a little bit of a bubble. You might see a little bit of a push. But I don't think that is a sustainable long-term approach," Milano said. "You can use that in combination with something else, but you can't just use that."

In the end, policymakers have to do something substantial to ensure the nascent recovery underway doesn't reverse course, or hurt the country's long-term economic prospects.

As Zandi put it in January:

The Great Recession is over, but the recovery will be a difficult slog through much of this year. The risks are also uncomfortably high that the economy will backtrack into recession.

Policymakers should provide more help to the economy to ensure the recovery becomes self-sustaining. The Federal Reserve must not raise interest rates too soon or end its credit easing efforts too quickly. Congress must provide more resources to unemployed workers whose benefits are running out, to state governments unable to balance their budgets, and to small businesses looking for credit and all businesses that expand payrolls.