For Job Creation, Is Government A Help Or Hindrance?
With economic growth so slow that forecasters see a significant risk of tipping back into recession, U.S. presidential candidates have been busy rolling out job-creation plans.
But the job plans are proliferating even as Washington is also focusing on how to cut federal deficits. Traditionally, fiscal restraint is viewed as the opposite of an economic “stimulus.”
Are these two goals – jobs and fiscal responsibility – at odds? The question points to a broader debate that has flared up about what role government should play in the economy.
Will the economy spring to life by – to borrow a phrase from Texas Gov. Rick Perry (R) – getting government “out of the way?” Or are government actions a vital source of economic fuel at a time when the private sector shows little momentum?
President Obama provided his answer to those questions while rolling out his new jobs plan on Sept. 8.
Washington “can help,” he said near the start of his address to Congress. And later he added: “In fact, this larger notion that the only thing we can do to restore prosperity is just dismantle government, refund everybody’s money, and let everyone write their own rules, and tell everyone they’re on their own – that’s not who we are. That’s not the story of America.”
Republican critics rushed to label his plans as more government “stimulus,” arguing that such ideas have been failing to work since Mr. Obama took office in 2009.
Both sides say the economy is in trouble. The Labor Department’s latest monthly employment tally, for August, showed zero new jobs. Federal policy isn’t the only reason, but it appears to be playing a role. Consumer confidence took a sharp midsummer dive just as highstakes bargaining over the nation’s self-imposed debt ceiling came to a head.
It wasn’t that Americans were losing faith in one party or the other. Approval ratings plunged for both Obama and Congress. In part, the debt- limit wrangling revealed a dysfunctional capital, but it also served as a wake-up call – with recent parallels in Europe and Japan – that government doesn’t have an infinite capacity to spend.
Gary Shilling, who heads an economic research firm in Springfield, N.J., says in a recent report that the world faces a crisis of confidence resulting “from the realization that governments, through their monetary and fiscal policies, have no magic bullets they can fire” to revive growth rates seen in the 1980s or ’90s.
So what can government do?
In his speech to the nation, Obama made the case for renewed fiscal stimulus – without using that now-tarnished word. He proposed a $447 billion American Jobs Act, including tax cuts (more than half the plan's cost), spending on infrastructure, and help for the unemployed.
The proposal would extend a temporary payroll-tax cut for a year, to keep an extra $1,500 flowing to a typical household. Another payrolltax cut would go to businesses, in a way designed to reward new hiring. Obama also urged other steps, from spending on schools and roads to maintaining extra weeks of unemployment insurance and launching a “returning heroes” tax credit for firms that hire veterans.
All this would come even as a congressional “super committee” is tasked with finding $1.5 trillion in budget savings during this decade. Obama said his new proposals should be paid for by having that panel find additional spending cuts or tax hikes in future years.
Obama’s plan contrasts sharply with ideas from GOP rivals for the White House. Just days earlier, former Massachusetts Gov. Mitt Romney released his own 59-point jobs plan. Where both men say their goal is to help job creation immediately, the Obama stimulus emphasizes temporary jolts while Romney pledged permanent changes to taxes and regulation.
Here’s a look at the arguments for these contrasting visions.
Government, get out of the way.
Governor Perry, who has emerged as a leading GOP presidential contender, summed up his strategy in those words, as an unshackling of private enterprise. “Free them up from overregulation” and overtaxation, he said in August. Romney hits the same theme, aiming to cut taxes on business and middle- class households, open new doors for foreign trade, and unleash new investment in domestic energy production. So do other Republicans.
A leading employer group, the National Federation of Independent Business, criticized Obama for largely ignoring this strategy.
“A huge federal stimulus program ... again sends the message that the president thinks he can spend his way out of this recession,” Dan Danner, the group’s president, said in a statement on Sept. 8. “There is a great deal of uncertainty among small businesses thanks to the threat of higher taxes and the thousands of pending federal regulations. The president’s speech did little to ease those concerns.”
Doing nothing is not an option.
In those words, Obama reaffirmed his view that temporary spending and tax cuts are an important way government can help when private sector demand for goods and services is weak.
Many economists agree and say Obama’s initial rounds of stimulus helped the economy start growing in 2009 and 2010. That the growth has cooled this year, with the stimulus programs starting to fade out, may simply confirm their usefulness.
“Instead of the government being a tail wind at the back of the economy ... it became a head wind,” says Gary Burtless, an economist at the Brookings Institution in Washington.
For all the flak that "stimulus” catches, Burtless says recessions are generally shorter and shallower as governments have learned to use fiscal and monetary policy to soften business cycles. He says now is an excellent time to borrow at low interest rates to fund investments in things such as schools and bridges.
The conservatives’ rebuttal: Yes, the nation has infrastructure needs, but more deficit spending will just dig the country deeper into debt without guaranteeing a stronger job market.
Liberals offer their own rebuttal to that critique: Beware of big moves to reduce federal deficits – as some Republicans urge – when the economy is on such shaky footing. Economists generally say the immediate impact of such a move would be some slowing in the economy. Analysts at Goldman Sachs, for example, say fiscal policy is now poised to subtract about one percentage point from growth of gross domestic product next year, and that Obama’s plan would turn the fiscal effect positive, adding 0.4 percent to GDP.
Amid this great debate about jobs and government policy, policy experts see room for middle ground.
Obama gave at least a nod to the idea of reducing regulation and permanently streamlining the business tax code to attract more job creation in the United States. Some Republicans have voiced openness to the temporary payroll-tax cuts and to a degree of infrastructure spending. And both sides applauded during the president’s speech when he said the economy needs help now, not after an election 14 months away.
Passing a jobs bill won’t be easy heading into an election year, especially with Obama suggesting that his proposals be paid for with some future tax hikes. But those signs suggest it’s not impossible, either.