At this point, most economists agree that the best way to save the economic recovery is to get moving on jobs. The question is how to do that. After months of dithering, it looks like we may be getting an answer from a down-trodden President Obama. His administration is coming out with a jobs plan next month. And today, the White House announced it’s tapping Princeton labor economist Alan Krueger to head the Council of Economic Advisers. So will these moves spur job creation?
The fact is, any jobs plan Obama puts forward isn’t likely to have much impact. The White House hasn’t sketched out specific plans yet, but the scale of the remedies being bandied about – extending unemployment benefits, renewing a payroll tax expiring end-2011, business tax breaks, workforce training programs, infrastructure spending – wouldn’t stab at the heart of the problem: weak demand. Without more consumers clamoring to buy more stuff, there’s little incentive for businesses to hire. And without that incentive, any efforts to boost hiring temporarily are bound to be just that: temporary. Economic forecaster Macroeconomic Advisers, for instance, estimates that extending jobless benefits, a payroll tax cut, and business tax breaks would boost the country’s 2012 GDP by less than 1 percentage point and employment by 600,000 jobs by the end of next year.
As for job training programs, the impact of those is likely to fade unless, in the meantime, demand for companies’ products starts to pick up speed. “For temporary training programs and hiring incentives to have much impact now, firms must be confident that when the temporary programs and incentives expire, economic conditions will validate the decision to hire earlier rather than later. In today’s economy, there’s certainly no guarantee this will occur,” the forecaster said in recent comments. “In sum, as disappointing as it may be to unemployed Americans, there simply are limits to what a jobs bill can achieve today.”
So what about Alan Krueger, the esteemed student of unemployment marching in to save the day? Could he reverse this gloomy reading with bigger, better initiatives? Matthew Yglesias of the Center for American Progress thinks no. Why? Krueger, he explains, is a specialist in the minute inefficiencies holding back labor markets, not the big picture. His work has focused on whether small-fry snafus like licensing required by certain vendors or regulations like minimum wage gum up hiring and growth. And what’s gumming up the market now is much bigger in scale. “My read of his work is that the kind of action he’s an aggressive and creative thinker about is relatively small bore, supply side changes rather than big picture efforts to fill the gap,” Yglesias says.
In Yglesias’s mind, we need more fiscal stimulus, and he’s not sure Krueger is going to drive that home. Macroeconomic Advisers echoes that point, not about Krueger specifically, but about the idea that, if fiscal stimulus is going to work, it has to be large-scale. And in this political environment (and with credit-raters breathing down the government’s back), large-scale simply won’t fly. The bigger the fiscal stimulus proposed, the less politically possible. Macroeconomic Advisers:
If public works projects are worthwhile as long-run investments, now is certainly an opportune time to start them. However, infrastructure spending cannot jump-start near-term hiring unless ramped up at a pace and on a scale that, outside of wartime, would be unprecedented. Some economists, like Princeton’s Paul Krugman, advocate exactly this policy, but in today’s political climate it simply won’t happen.
The conclusion? Large-scale action in the short-term coupled with big mid-term cutbacks is the way to go to get the economy moving. I tend to agree with economists like Nouriel Roubini, who think that action should be directed at the root of the demand problem: suffocating housing debt. But that’s not what’s in store, since neither Krueger, nor any economist, has the magic equation (no new spending + swift job growth) that would change the foul mood in Washington. It’s time to face up to a long, hard recovery regardless of who’s in charge.