Opinion and Economic Analysis

HICKS: Efficacy of the American Jobs Act questionable

September 17, 2011

In my professional judgment, President Obama’s proposed American Jobs Act is as fair an attempt at stimulating the economy as is now possible. Whether or not it is good policy or will work are other questions.

The plan itself does five things:

• Cuts Social Security contributions for individuals and businesses.

• Provides $35 billion to states to operate schools and another $25 billion in school infrastructure spending.

• Adds $54 billion in unemployment insurance payments, extending benefits and adding youth employment programs and tax incentives for businesses that hire the long-term unemployed.

• Adds $75 billion in infrastructure spending to include the creation of an infrastructure bank.

• Reduces barriers to refinancing FHA loans for homeowners who are underwater in their mortgages.

To begin understanding what this plan can do, we have to look at the February 2009 stimulus. That plan illustrated the slothful pace of infrastructure spending in eye-opening fashion. There really are no shovel-ready projects. The notion that Congress could pass, allocate and transfer dollars to states that then prioritize projects, bid them out, award contracts to businesses who then plan, hire and purchase materials in something like a year is flat-out ridiculous.

That worked in the Great Depression, when tens of millions of young men picked up shovels, built roads, planted trees and even finished the Appalachian Trail. Today, it would take decades to simply complete an environmental impact study on the Appalachian Trail, much less build it.

Infrastructure spending in America might be needed, but it is not short-term economic stimulus. So, the $100 billion or so of infrastructure spending will be a nice addition to the 2013, 2014 and 2015 economy.

States that are laying off teachers because of past fiscal profligacy will get a break next year. One might suppose this prolongs the agony, which it does. The same can be said about extending unemployment compensation, which—as I noted in a recent column—keeps unemployment rates high.

My estimates suggest that the effect of increased unemployment compensation and lower payroll taxes is a roughly three-quarters of a percent boost in growth and another 925,000 more jobs by the end of 2012. This would reduce the unemployment rate by perhaps 0.4 percent. It is good that these jobs cost only $515,000 apiece; otherwise, this plan might be mistaken for electioneering.

Both the benefit and curse of a fiscal stimulus plan is that it shifts economic activity from the future to the present. It is a benefit if most people believe future growth will make the losses from the stimulus negligible. It is a curse if most people believe the future costs will lead to higher taxes.

I hope for the first, but am preparing for the second. It is just this sort of anticipation of higher taxes that is now stalling the economy and why the efficacy of this plan is questionable.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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