How Washington Could Create Jobs

MarketWatch

Congress has the means to spur job growth, economists say, if it can find the will

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The federal government has spent hundreds of billions of dollars to lift Americans out of the worst economic downturn since the 1930s, but jobs remain in short supply.

About 14.8 million people are unemployed — an increase of more than 7 million since the recession began. And as slow as Congress has been to act while Democrats controlled both chambers, an increasingly divided political landscape after the election is expected to create an even worse logjam in Washington.

Still, there could be room for more jobs programs if lawmakers allow cuts to be made elsewhere, observers said. And if Washington can find the will, economists say there are ways the government could spur job growth, and help the nation recover from a recession that technically ended last year but is still damaging families across the country.

Spending on infrastructure is one way to help create jobs, and it might enjoy political support, said Mark Zandi, chief economist for Moody's Analytics, an economic and financial research firm.

Infrastructure projects build jobs

Analysts have found that spending on infrastructure has a relatively high payoff in terms of boosting the overall economy. Another major point in favor of additional infrastructure spending: It would help some of the workers who have been most hurt in the recession, such as construction workers.

"That would be a good way to go that has political tailwinds to it," Zandi said. "There will be more political gridlock in the wake of the election, but I sense that there is room for potential compromise on this."

It might even be possible to increase infrastructure spending at little cost to taxpayers, Zandi said. For example, private capital could be used to build roads, bridges and sewer systems, and the government could allow companies to charge user fees and tolls.

"A lot of pension funds, insurance companies, have liabilities that are very long term," Zandi said. "This kind of income stream is stable, so it would be a perfect investment for that kind of capital."

However, political leaders have been too slow to implement infrastructure projects, said Gary Burtless, an economist at the Brookings Institution, a Washington think tank.

"It's not as though it's hard to find construction workers, or the inputs needed. What's in short supply is the imagination and resourcefulness of public leaders in getting the money spent fast," Burtless said. "We want to get people on payrolls quickly. For some reason we seem to have forgotten how to go about building public infrastructure projects in the near term."

Austan Goolsbee, chairman of the president's Council of Economic Advisers, recently told MarketWatch that policies that encourage investment in the U.S. are the best way to generate sustainable job creation.

"Some of those the president has been putting in place, like the small-business bill," Goolsbee said. "Some are on his agenda — he has called for allowing expensing of investment, encouraging infrastructure spending, encouraging R&D spending by private companies.

"We need to return to a boom that is of a different style than it was in the 2000s. The 2000s boom was driven by consumption growth that was not sustainable," Goolsbee said. The president "wants us to go to more of a business-investment-led boom, an export-driven boom, with consumption growth proportional to income, but in a sustainable way where people have a personal savings rate more like 5%, not zero or negative."

In September, House Republican Leader John Boehner, of Ohio, said the president's proposals "fall well short" of addressing the main obstacles to job creation.

"I think the president is missing the bigger point here ... With all of the spending in Washington, and all the uncertainty facing small businesses — including the coming tax hikes on January 1st — until this uncertainty and spending is under control, I don't think these are going to have much impact."

Support state and local governments

Another effective strategy would be to increase aid to state and local governments, economists said. Expanding that assistance could be achieved relatively quickly, and would have an immediate positive impact, said Lawrence Katz, an economist at Harvard University.

Still, there could be room for more jobs programs if lawmakers allow cuts to be made elsewhere, observers said. And if Washington can find the will, economists say there are ways the government could spur job growth, and help the nation recover from a recession that technically ended last year but is still damaging families across the country.

Spending on infrastructure is one way to help create jobs, and it might enjoy political support, said Mark Zandi, chief economist for Moody's Analytics, an economic and financial research firm.

Infrastructure projects build jobs

Analysts have found that spending on infrastructure has a relatively high payoff in terms of boosting the overall economy. Another major point in favor of additional infrastructure spending: It would help some of the workers who have been most hurt in the recession, such as construction workers.

"That would be a good way to go that has political tailwinds to it," Zandi said. "There will be more political gridlock in the wake of the election, but I sense that there is room for potential compromise on this."

It might even be possible to increase infrastructure spending at little cost to taxpayers, Zandi said. For example, private capital could be used to build roads, bridges and sewer systems, and the government could allow companies to charge user fees and tolls.

"A lot of pension funds, insurance companies, have liabilities that are very long term," Zandi said. "This kind of income stream is stable, so it would be a perfect investment for that kind of capital."

However, political leaders have been too slow to implement infrastructure projects, said Gary Burtless, an economist at the Brookings Institution, a Washington think tank.

"It's not as though it's hard to find construction workers, or the inputs needed. What's in short supply is the imagination and resourcefulness of public leaders in getting the money spent fast," Burtless said. "We want to get people on payrolls quickly. For some reason we seem to have forgotten how to go about building public infrastructure projects in the near term."

Austan Goolsbee, chairman of the president's Council of Economic Advisers, recently told MarketWatch that policies that encourage investment in the U.S. are the best way to generate sustainable job creation.

"Some of those the president has been putting in place, like the small-business bill," Goolsbee said. "Some are on his agenda — he has called for allowing expensing of investment, encouraging infrastructure spending, encouraging R&D spending by private companies.

"We need to return to a boom that is of a different style than it was in the 2000s. The 2000s boom was driven by consumption growth that was not sustainable," Goolsbee said. The president "wants us to go to more of a business-investment-led boom, an export-driven boom, with consumption growth proportional to income, but in a sustainable way where people have a personal savings rate more like 5%, not zero or negative."

In September, House Republican Leader John Boehner, of Ohio, said the president's proposals "fall well short" of addressing the main obstacles to job creation.

"I think the president is missing the bigger point here ... With all of the spending in Washington, and all the uncertainty facing small businesses — including the coming tax hikes on January 1st — until this uncertainty and spending is under control, I don't think these are going to have much impact."

Support state and local governments

Another effective strategy would be to increase aid to state and local governments, economists said. Expanding that assistance could be achieved relatively quickly, and would have an immediate positive impact, said Lawrence Katz, an economist at Harvard University.

"Right now states are a fiscal drag. [Assistance] would prevent layoffs, and get money out there, and do a lot of good, whether it's for education or keeping police," Katz said.

While Washington has already sent some aid to state and local governments, some economists say more is needed. The weak housing market and high unemployment have hit states hard, and some states are cutting a slew of public programs and services to balance their budgets.

"The worst recession since the 1930s has caused the steepest decline in state tax receipts on record," according to recent analysis from the Center on Budget and Policy Priorities. "As a result, even after making very deep spending cuts over the last two years, states continue to face large budget gaps. States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs."

When a teacher or policeman loses a job, the community loses his services, but it also means that worker stops buying goods and services, helping to perpetuate a dangerous economic spiral, economists said.

"As states cut programs, they are taking money out of the economy, and that not only leads to layoffs in the public sector, but also the private sector," said Lawrence Mishel, president of the Economic Policy Institute, a think tank in Washington. "Providing money to the states for health and education jobs also benefits private-sector jobs. When you keep everyone employed they are out buying from the private sector."

Mishel said that partisan politics are likely to stand in the way of Congress sending more money to state and local governments. Still, he said, despite the country's $1.3 trillion deficit — almost 9% of gross domestic product — spending more now to create jobs is a good idea.

"There's a vast misunderstanding about the deficit," Mishel said. "The reason we have a large fiscal deficit is because we had a huge recession, not because spending is out of control. We will never get the fiscal deficit under control unless we create many, many more jobs. Generating more jobs is actually a complement to getting the deficit under control."

Still, with a national unemployment rate of 9.6%, reviving the labor market won't be inexpensive, said Timothy Bartik, senior economist at the W. E. Upjohn Institute for Employment Research in Kalamazoo, Mich.

"Even if job creation can be made relatively cheaper, it will still cost a lot of money to make a big dent," Bartik said.

Tax incentives for businesses

Economists also support various tax incentives for private investment and hiring. First and foremost, to help job growth Washington needs to nail down the tax code, Zandi said.

"Uncertainty has been an impediment to businesses using their profits and cash for investing and hiring," Zandi said. "It's disconcerting for business people, and that's a problem. They don't know how to plan. If they can't cross the Ts and dot the Is, they are unlikely to make a big hiring decision. Business people need everything colored in before they make a big decision."

Burtless favors tax incentives to persuade companies to move forward soon with investments and hiring.

Cutting payroll taxes would be helpful, though expensive, said economist David Autor of the Massachusetts Institute of Technology.

"It makes it cheaper for employers to employ people," Autor said. "It would be an effective way to stimulate demand."

Help hard-hit groups

Economists also favor policies, such as youth employment programs, that target specific groups facing a particularly tough labor market. The unemployment rate is about 23% for white teens, and a whopping 49% for African American teens.

"There is great harm being done right now to young people out in the labor market and not able to find jobs, and not able to get on the lower rungs of career ladders," Mishel said.

The downturn has been particularly tough on groups with unemployment rates that were already high before the recession, Goolsbee said.

"Many of the groups that have the highest unemployment rates are also the most cyclical – they're the hardest hit when the economy turns down, and if you can turn the economy up they tend to be the groups that are the next in line to come back," he said.

One way to create more opportunity for young workers, Mishel said: Let older workers collect Social Security at a younger age.

"If they retired that would open up jobs for younger people," he said. "We would be moving people out of jobs. We don't even need to create new jobs. Getting older people out so that young people could have jobs is very intuitive."

However, Dean Baker, co-director for the Center for Economic and Policy Research in Washington, said older workers may not have enough retirement savings to leave the workforce early.

Baker said work-sharing programs, in which the government encourages firms to reduce hours, rather than layoff workers, are effective. "You are keeping someone in touch with the labor force," Baker said.

The president likes the idea of work-sharing policies, Goolsbee said.

"Look at Germany, they have engaged in a significant amount of work sharing, and the unemployment rate has remained relatively low, and the slack was absorbed by reduced hours rather than reduced workers. I think [work sharing] is definitely worth considering, and the president has been supportive of that," Goolsbee said.

MIT's Autor said a more highly valued yuan would help the U.S. job market. The increase of the trade deficit with China could displace more than 500,000 U.S. jobs this year, according to a recent analysis by the Economic Policy Institute.

"There's no easy answer," Autor said. But a revalued Chinese currency "would have a substantial effect on U.S. employment."

Ruth Mantell is a MarketWatch reporter based in Washington.

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