In crafting a spending plan, federal officials must choose between measures that give a fast lift to the economy and those that create sustainable new jobs
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November 12, 2008
It's now become apparent that the most painful part of the economic downturn—the part where many thousands of people lose their jobs—is picking up speed. On Friday, Nov. 7, the Labor Dept. announced that this year through October the U.S. economy lost 1.2 million jobs. That brought the unemployment rate to 6.5%—its highest level since 1994. Add to that a stream of recent layoff announcements (BusinessWeek.com, 10/20/08) by the likes of Merck (MRK), General Electric (GE), and Yahoo (YHOO). Just this week, DHL (DPWGN.DE) announced it would cut 9,500 jobs as it pulled out of express package delivery in the U.S.
In his press conference on Nov. 7, President-elect Barack Obama said that passing an economic stimulus plan would be his first priority as President. "The American people need help," said Obama. "This economy is in bad shape." A stimulus package of very large government spending projects is almost certain, if not in the lame-duck congressional session beginning Nov. 17, then immediately after Obama takes office on Jan. 20.
Some of the likely congressional actions will address the immediate needs of those who are without work. It is likely to enact a package that includes extending the period in which the unemployed can draw benefits, from 26 weeks to up to 39 weeks.
Heavy Dose of Job Creation
But beyond that, there are conflicting views on which spending is the most likely to create jobs, how soon, and for whom.
Taxpayer money can be used in several ways to aid the job market—directly, by creating jobs or investing in companies that will hire people to build things; and indirectly, putting cash in people's pockets in hopes that they spend it and maintain jobs down the line. Many Republicans argue that the government is better off cutting taxes; the party has put forward ideas like doubling the child tax credit and temporarily scrapping the capital-gains tax.
But with an incoming Democratic Administration and Democrat-dominated Congress, an economic stimulus bill will likely have a heavy dose of job creation and increased benefits for the jobless.
Focus on Infrastructure and Energy
On the campaign trail, Obama proposed creating jobs in two main areas: infrastructure and energy. For infrastructure, he suggested the U.S. create a National Infrastructure Reinvestment Bank, an independent entity that would receive $60 billion over 10 years from the federal government to finance transportation infrastructure projects. He said this plan would create up to 2 million new direct and indirect jobs and stimulate approximately $35 billion per year in new economic activity.
In October, U.S. House Speaker Nancy Pelosi (D-Calif.) unveiled a $150 billion stimulus plan that includes infrastructure spending and federal support to states governments, which Obama backed. The U.S. House had passed a stimulus bill in September with $18.5 billion for infrastructure projects, but Republicans opposed it.
The Bush Administration's Transportation Dept. has criticized such proposals, saying that building or rebuilding highways, bridges, and train systems requires a long series of steps to plan, design, get environmental clearance, and construct. Jack Wells, the department's economist, says that only 27% of the funds being proposed in the Pelosi package would be disbursed within a year.
Creating Green Jobs
However, other economists say these types of investments have another purpose: to add long-term stability to the economy. "For 20 to 30 years the government neglected to build and maintain infrastructure, and now it's shabby," says Rajeev Dhawan, director of Georgia State University's Robinson College of Business. "With infrastructure, you are creating more work for contractors, engineers, and architects—well-paying, middle-class jobs."
Dhawan says that Obama's and Pelosi's proposals are a step in the right direction, but potentially not enough of an investment. "One hundred fifty billion over 10 years is nothing," he says. "You have to have investment of a substantial magnitude to make a dent in a $14 trillion economy." He says Japan spent up to 10% of its gross domestic product on infrastructure in the 1990s to aid its economy. For the U.S., that would amount to $1.4 trillion.
Obama also says he wants to create 5 million green jobs by investing in renewable energy. He wants to spend $150 billion over 10 years to advance biofuels and their infrastructure, accelerate the commercialization of plug-in hybrid cars, develop commercial-scale renewable energy, invest in low-emission coal plants, and begin transition to a new digital electricity grid.
Looking for Stabilization
Some economists and analysts support the plan, saying it could spur skilled employment in research and development and eventually boost blue-collar production jobs to replace some of those that have been lost to lower-wage countries. They argue that the government must play a more active role in job creation, as the private sector loses its ability to do so.
"Extending unemployment insurance may be the right policy decision, but it doesn't create jobs," says John Challenger, CEO of Chicago outplacement firm Challenger, Gray & Christmas. Challenger says putting people to work on infrastructure and energy jobs as Obama has proposed would help the economy rebound and stabilize.
But others are skeptical; they worry that the jobs won't be sustainable if they're in industries that aren't competitive with less costly alternatives. With oil prices dropping sharply to below half of their July peak, there is already concern that some investment in green technology will become uneconomical.
Factoring in Falling Oil Prices
"It seems to me that it's a brilliant political move to deflect attention from the economic downside of Obama's energy and environmental proposal," says Max Schulz, energy policy analyst at the Manhattan Institute, a free-market-oriented think tank. "Mandates that insist on renewable energy that is more inefficient and expensive than coal and nuclear won't help the economy."
In any case, the economy can't wait for building or energy projects that take years. Consumer spending and confidence have dipped, which threatens the overall functioning of the U.S. service-based economy. So we are likely to see a rapid injection of funds directly into the hands of people who are most likely to spend it and get it circulating in the economy.
"We need to do something immediately to help stimulate demand," says Andrew Stettner, deputy director of the National Employment Law Project (NELP), a low-wage-worker advocacy organization. "We need to do something that gets money into people's hands that they will spend." NELP advocates both the unemployment assistance extension and the Unemployment Insurance Modernization Act, which would award states more money for unemployment benefits and provide assistance to 500,000 additional workers.
Good "Bang for the Buck"
An extension of unemployment benefits has one of the highest pass-through rates of any federal spending choice, says Mark Zandi, chief economist and co-founder of Moody's Economy.com, a subsidiary of Moody's Corp. (MCO). The June passage of 13 weeks of additional unemployment benefits, for those who had exhausted the maximum 26 weeks of benefits, cost $20 billion. Now, Zandi says, another $20 billion is needed for a second extension.
In testimony before the U.S. House of Representatives in June, Zandi offered estimates of how much each dollar of government spending in different forms would produce in real GDP each year. He said extending unemployment benefits would yield $1.64 of GDP, a temporary increase in food stamps $1.73, aid to state governments $1.36, and increased infrastructure spending $1.59. "The bang for the buck is very high," Zandi said of extended jobless benefits.
Some economists and politicians would rather debate whether to spend hundreds of billions of taxpayer dollars at all. "The federal government does not have unlimited resources to borrow and spend on whatever," says James Hamilton, professor of economics at the University of California at San Diego. "We need to reflect on what went wrong [to create the financial crisis], and not run off in every direction."
Filling the Void
The problem is that without some sort of huge stimulus, the U.S. recession could turn into a depression. "Consumers are retreating, people are losing their jobs, and only the government can fill the void," says Zandi.
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