President-elect Barack Obama has pledged to create 3.5 million
new jobs by the end of 2010. Of course, he does not intend to
create the jobs himself but for the economy to create the jobs
stimulated by his policies. In a welcome development, the
President-elect has provided a clear measure by which to judge the
performance of his policies.
The United States economy employed about 113 million people in
the private non-farm labor force in December 2008, according to the
most commonly used measure of employment generated by the
Department of Labor. The Obama jobs pledge will be met, therefore,
if employment reaches 116.5 million by the end of 2010. This level
of job growth suggests that our nation should expect a sizable
expansion of output and income generated by the U.S. economy by the
end of 2010. Reaching this goal will require effective stimulus
policies from the federal government, and the only fiscal policy
that can even come close to reaching the goal is to cut marginal
tax rates.
The Jobs Target
Employment in the United States peaked at about 115.8 million
jobs in November 2007. Weakness, especially in the housing sector,
caused a slow deterioration in the labor market through August 2008
with an average monthly loss of 94,000 jobs, but the contraction in
employment accelerated in September. According to the most recent
jobs reports, private-sector employment contracted by an enormous
581,000 jobs in November and by 531,000 more in December.
Recent events confirm that the target for jobs creation was
chosen carefully. Obama's first jobs pledge prior to the November
jobs figure was to create 2.5 million jobs. Added to the level of
employment at the time, this would have meant private-sector
employment was to reach 116.5 million. The November jobs report
showed a drop in employment of about a half million, and the job
creating target was increased by a half million, to 3 million jobs
created, affirming the 116.5 million total jobs target. Then the
December jobs report showed about another half million jobs lost
and the President-elect raised the jobs target again to its current
total of 3.5 million jobs, re-affirming the 116.5 million jobs
target.
The emphasis is on private sector jobs because while public
sector employment at the federal, state, and local levels often
contributes to our national security, economy, and society in
meaningful ways, these jobs must all be supported by the private
sector. The economy does not advance by asking private sector
workers to bear the cost of thousands of additional government
workers.
The President-elect has said repeatedly that he intends to "save
or create" these jobs through his policies. A stimulus program will
be effective if the economy contracts less than it would have
without the stimulus, thereby saving jobs. However, it will never
be clear how many more jobs would have been lost absent the
stimulus, and so no attempt to quantify the number of such jobs
would be credible. The President-elect is unlikely to waste his
credibility on a shadowy jobs number promise, so the beneficial
presumption is that he is referring to his policies creating
jobs--that is, raising the absolute level of private-sector
employment to the target of 116.5 million.
The Wrong Direction for Fiscal
Policy
The credit crunch has produced a recession that is likely to be
quite severe. The Federal Reserve has responded massively with
traditional measures such as cutting the Fed Funds rate almost to
zero and through awe-inspiring new programs to purchase assets
directly from various frozen credit markets.
The new President and new Congress are sure to want to join a
robust fiscal policy response to the powerful monetary policy
response and will need to do so to meet the 3.5 million jobs
pledge. To be helpful, the fiscal policy stimulus must be
well-designed, and to be effective it must have sufficient
heft.
Most of the stimulus talk out of the Congress to date,
consistent with expressions from the Obama team, centers around
massive new spending programs. The federal government appears
likely to run deficits totaling over $2 trillion over the next two
years even before any stimulus is added. If deficit spending were
truly stimulative, the economy would already be poised to race.
Additional deficit spending will be no more effective than the
first $2 trillion, and the reason is very simple: Government
spending does not create additional demand in the economy. Deficit
spending must be financed by borrowing, so while government
spending increases total demand, government borrowing reduces
private demand.[1] If Obama and the Congress choose this path,
there is very little chance of making good on the jobs pledge.
Job-Creating Policies for the Great
Recession
The only effective fiscal stimulus is to defer the pending tax
hike into the more distant future and cut individual and corporate
tax rates further.[2] Stimulating the economy requires reducing
the impediments to starting new businesses, hiring, working, and
investing. Reducing regulatory burdens would help, but doing so is
time-consuming from a legislative perspective, and there are no
obvious and meaningful sources of excessively burdensome regulation
that can be quickly remedied. The only quick, and effective, remedy
is to cut tax rates. This is the path Obama needs to take to make
good on his pledge to create 3.5 million more private-sector
jobs.
J. D. Foster, Ph.D., is Norman
B. Ture Senior Fellow in the Economics of Fiscal Policy in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Foundation.