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Tax Cut Deal Not Most Effective Way Of Creating Jobs, Say Leading Economists

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The new tax cut deal in Washington would curb unemployment at a far higher cost than if the government were to create jobs directly, according to an analysis of its potential effects.

What's more, predictions about the program's benefit to the economy differ little from predictions made before the deal was struck. In other words, the tax cut measure might not contribute much to growth. And if it does, it might not be the most efficient strategy the government could have used.

The proposed program--which would include extensions of tax cuts for the wealthy, a payroll tax cut and a reauthorization of unemployment insurance--would save or create about 2.2 million jobs over the next two years, according to analysis by the Center for American Progress. As the government would forgo revenue it otherwise would have collected, the program's cost would be about $594 billion.

That means each job would cost the government about $137,000. The salaries and benefits delivered to workers would likely be less.

As experts have argued, a more efficient strategy might be for the government to create jobs directly, through public works projects. Princeton economist Alan Blinder proposed such a program last year, pointing out that at $30,000 a job, a million jobs would cost the government $30 billion. At that rate, 2.2 million jobs over two years would cost the government just $132 billion.

David Rosenberg, Gluskin Sheff chief economist, has said a government jobs program would help put unemployed people to work. As jobs do not exist for roughly four out of every five unemployed Americans, government job-creation could be a boon.

"At least FDR paid people to work," Rosenberg wrote in August. "Almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months. Let's get these people re-engaged in the labour market, get them re-tooled and retrained for the skill set that businesses need now and in the future."

"It's time to get creative and aggressive with minimal cost to the taxpayer," he added.

Gus Faucher, an economist at Moody's Analytics, acknowledged the tax cut deal wouldn't be the most effective remedy for the economy.

"Are there more effective ways of creating jobs than this program? Yes," Faucher said. "Are those enactable? I don't know."

To what degree the tax cut package would benefit the economy remains to be seen. As David Leonhardt noted in the New York Times, economists expect the legislation would reduce the unemployment rate--currently 9.8 percent--by up to a full percentage point over the coming year. A new report from Moody's Analytics forecasts that the tax plan would cut unemployment to 8.7 percent during 2011, predicting that without the legislation, the rate would be 9.8 percent.

But forecasts made before the deal was struck aren't much different. In early November, the Federal Reserve predicted the unemployment rate would be around 9 percent by late 2011. In September, the Congressional Budget Office predicted unemployment would be at 8.8 percent by the end of 2011, averaging 9 percent over the course of the year. (CBO also thought, however, that the unemployment rate would be 9.3 percent by the end of 2010 -- which now looks unlikely.)

The Moody's Analytics report, from chief economist Mark Zandi, was optimistic about the tax deal's potential impact. Zandi revised his prediction for 2011 GDP growth up to 3.9 percent, from the previous estimate of 2.8 percent.

The reauthorization of unemployment benefits and the payroll tax cut, the Moody's report says, would be the most significant engines of growth.

"Those are much more effective in terms of stimulating the economy than extending the Bush tax cuts," Faucher said.

Faucher also noted that even if the full $137,000 cost per job doesn't go into workers' pockets, it would help stimulate the economy in other ways. Bosses might use that money, for example, to boost business profits and create additional jobs "over the long run."

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