Document date: September 19, 2011
Released online: September 19, 2011
This brief lays out a feasible, cost-effective strategy for job creation. It would create 4 million new jobs at a budget cost of less than $60 billion and is far more affordable and effective than President Obama’s $448 billion proposal to create up to 2.1 million jobs. Lerman’s five plan components include expanding energy development, increasing demand for owner-occupied housing through homeownership vouchers and refinancing, a generous tax credit for expanding employment, an expansion of apprenticeship training, and direct job creation. These components would likely stimulate enough jobs to reduce the unemployment rate from 9.1% to 5.5%.
Speaking to Congress on September 8th, President Obama used what he called “simple math” to describe why we can’t both give tax breaks to the rich and put teachers back to work. But, simple math makes the President’s jobs plan look inefficient and off target. And the plan only offers a modest spur to the moribund housing sector that is the biggest roadblock to economic recovery.
Targets first. How many jobs are really needed to wrestle the unemployment rate down from 9.1% to acceptable levels, say 5.5%? If today’s work force participation rates were at 2007 levels, then 158.4 million people would be either working or seeking work. But current employment stands at 139.6 million, so we would need 10 million more jobs to get the unemployment rate down to 5.5%.
Government actions that created 4-5 million new jobs would probably spur enough economic activity to get us to the 10 million target. That’s because the earnings of the added workers and revenues they generate would stimulate more economic activity and jobs.
So how do we get those added 4-5 million jobs? Mr. Obama proposes a $448 billion tax and spending plan. But when you run the numbers, as the forecasting firm Macroeconomic Advisers did, you net only about 1.3 million jobs by the end of 2012 and perhaps another 0.8 million in the next year. Simple division reveals that the deficit cost per added job ranges from $213,000 to $345,000 ($448 billion/2.1 million or $448 billion/1.3 million). If budget deficits were low, it might be worth that high cost per job. But with today’s $1 trillion+ deficit, cheaper options are called for. After all, a full-time private sector job at the national median annual salary pays only about $35,500, and the unemployed come from groups that generally earn far less than that. But, to be generous and keep the math simple, let’s allow $40,000 per added job. At this cost, the total price tag for 4 to 5 million jobs would run between $160 and 200 billion.
Next question: Would a lower cost job stimulus like this work? No doubt a mix of strategies is required, and some might cost more and some less than $40,000/new job.
Start with the low-hanging fruit—expanded energy development that improves the environment. The U.S. sits atop massive economically recoverable reserves of natural gas. Natural gas has significantly lower greenhouse gas and air pollution emissions than any other fossil fuel.
Speeding up permits for extraction and distribution would allow the U.S. to substitute natural gas for dirtier coal and oil, create hundreds of thousands of high- wage and high- value jobs, reduce foreign oil imports, and lower oil prices and world demand for oil. Converting truck and car fleets from gasoline to natural gas looks increasingly cost-effective and can cut smog and other emissions too.
Strong federal leadership is needed to move gas development forward more rapidly. The federal and state permitting processes are moving forward at a snail’s pace, as in New York State, where there is great potential for developing shale gas. An initiative to speed permitting for extraction and distribution would allow the U.S. to more rapidly substitute natural gas for more polluting coal and oil, to create hundreds of thousands of high wage, high value jobs, to reduce significantly imports of foreign oil, and to lower world demand for oil and thus oil prices. Conversion of vehicle fleets (especially large trucks in the short run) from gasoline to natural gas looks increasingly cost-effective and can also yield significant environmental benefits.
While netting governments billions of dollars of revenues, these moves would create high- wage jobs in mining and in related manufacturing. In Pennsylvania alone, natural gas development has generated some 160,000 jobs. And North Dakota’s energy boom has driven wages up and the state unemployment rate down to 3.2%. By expanding development in other states with major reserves, we could create at least 200,000-300,000 additional jobs in energy, manufacturing, and services.
The next step is to reinvigorate the devastated housing sector, where construction toppled from a peak of 1.8 million to .4-.5 million units over the past couple of years. Since 1945, housing construction has sped economic recovery after dips, but not this time. Stimulating demand for owner-occupied housing would boost job formation in construction and allied industries, especially manufacturing. To the extent the added demand eases downward pressure on home prices, it would add jobs indirectly too. Banks would lend more for housing and construction as they become more solvent and less risk averse and small business people once again got to tap their home equity. Increased housing wealth would spur consumption as well.
One way to jumpstart housing construction is to create 1 million homeownership vouchers patterned after the rent voucher system, while phasing out the Low-Income Housing Tax Credit, an inefficient subsidy that simply expands supply. Voucher recipients who qualify for low-income housing assistance would pay 30% of their income for housing and would have to pass classes on managing homeownership. In return, they would receive a voucher set at current levels (the 40th percentile of rents in the area) or at the carrying cost of a home at the 25th percentile of home prices, whichever is less.
This plan has legs because in nearly all localities current vouchers are worth more than the monthly cost of owning a home at the 25th percentile of the market. Rising demand could seriously dent excess housing inventory. If it hit the 1.1 million mark it was in 1997-2001 before the boom and bust in housing markets, we’d see 200,000 more jobs in residential construction and at least another 100,000 elsewhere. (For more on how we can increase demand for owner-occupied dwellings by one million while helping many low-income families reduce their housing burdens and save federal dollars, see policy memo on Homeownership Vouchers (on another web site not related to Urban Institute).
Going one step farther, why not add home upgrading to the homeownership voucher to add jobs affordably? If contractors employed and trained low-skill, low- wage workers to work alongside experienced certified construction workers, the upgrade in government-subsidized housing would be accompanied by job creation and skill development. A long-run benefit is that the government would lock in a low subsidy level because of today’s unusually low mortgage rates and home prices. President Obama’s $15- billion Project Rebuild proposal allows government and nonprofit grantees to move in this direction, but at a high budget cost and a very uncertain impact on the demand for owner-occupied dwellings.
Another zero-cost, housing-related proposal is to provide access to today’s low mortgage rates to homeowners whose mortgages are current but can’t get refinancing because their home value or their income has declined. Homeowners who have kept up their mortgages during these difficult times are even more likely to keep paying at lowered mortgage rates and monthly payments. Current lenders and bondholders could lose their hold on above-market interest payments, but would gain as risks of default fall. President Obama referred to this idea, which would boost economic demand as savings from refinancing get spent, but has yet to spell out the details, partly because the overseer of Fannie Mae and Freddie Mac opposes this approach.
A third cost-effective approach is a marginal employment subsidy: government gives employers palpable per-job subsidies for employment increases above some base level. The plan, put forward by Timothy Bartik and John Bishop, would provide a 15% subsidy for increases in the employer’s wage bill (the part subject to social security taxes) above the prior year’s level in the first year and 10% in the second year (the plan’s details are available at http://www.epi.org/publication/bp248/).
Such a plan, its authors say, would add 3 million jobs in the first year and about 2 million in the second year for about $6,000 per new job--or roughly $18 billion in the first year. Their estimates include induced impacts on GDP, which standard cost estimates produced by the Congressional Budget Office usually does count. So, let’s exclude these budget savings; when we do, the first year costs rise to $34 billion, increasing the cost of each new job rises to about $11,500-- still far less than our $40,000-per-job target.
President Obama also proposes reducing employer payroll taxes to stimulate jobs, but his $65-billion+ plan has three pitfalls. The 3% subsidy for all workers goes to all small businesses, not just those that increase employment, and nearly the whole sum would go for existing jobs. The proposal’s 6% subsidy for firms adding jobs could falter as well because the subsidy rate is so low that few employers will take the bait. And the proposal’s two targeted hiring subsidies for long-term unemployed veterans ($6,500) and other long-term unemployed ($4,000) will at best reallocate jobs, as happens when a worker from subsidized group lands a job and an unsubsidized worker does not. Beyond that, past evidence confirms that the very act of telling employers you are in enough trouble to qualify for a government subsidy (that is, failing to find a job for at least six months) tends to stigmatize workers enough to discourage hiring or at best to have no positive impact on the disadvantaged group but at significant government cost.
A fourth low-cost job-creation strategy worth a try right now is expanding apprenticeship programs. Apprenticeship combines serious, work-based learning with classroom instruction so novices master core occupational skills and earn valued credentials documenting that mastery. Several rich countries turn to apprenticeship to keep manufacturing up, wages high, and youth unemployment low and stay competitive globally . Here, our apprenticeship system is relatively small, but the gains for apprentices and employers, by some estimates, outstrip those from community college! Now is a good time to invest more in apprenticeship training. Government could offer a $6,000 subsidy per apprentice for increases in registered apprenticeship beyond 80% of last year’s level and beef up the Labor Department Office of Apprenticeship’s marketing and technical assistance programs. Nearly all of the subsidies would go to expand the number of apprenticeships. South Carolina saw its program double after introducing subsidies. If the apprenticeship subsidy and added marketing increased apprenticeships by 50% in the U.S. as a whole, it would mean an additional 200,000 jobs and quality training for about $1.5 billion--roughly $7,500 per new job.
Other ideas for low cost new jobs belong in a winning portfolio too. One is job- creation subsidies for jobs sponsored by nonprofits and government. In direct job creation, it’s hard to avoid substituting federally-funded workers for regular workers, enhance skills, and produce useful output, but years ago Canada managed to create relatively low-wage jobs by requiring sponsors to compete for funding—specifying the “public goods” they promise to produce, whether bike paths, repairs and weatherization for low-income housing, recreational centers, child care, or home care assistance for elderly and disabled. Keys, experience shows, are monitoring and documenting subsidized workers’ performance, keeping applications simple, allowing competition so only the best projects get funded, hiring enough monitors and technical assistance staff, and pulling the plug on projects that don’t meet production targets. This program could provide 500,000 workers with $9 to $12 dollar per hour jobs for about $15 billion, or $30,000/net job. President Obama’s plan features a summer jobs program for youth and some other low-cost job-creation initiatives, but they represent a tiny share of the bill’s spending.
The President’s plan does include some sensible provisions aimed at reforming unemployment insurance (UI). One part of the plan, reinstating extensions so that UI recipients can receive benefits for up to two years, helps the long-term unemployed but lessens the urgency of finding new jobs. The President’s reemployment reforms might be able to offset the unintended negatives of UI extensions. Better tracking of the eligibility and job search efforts and more funds for job search assistance and career guidance should stimulate more active job search. New work-sharing provisions, which allow workers reduced to part-time work to claim partial UI benefits, might discourage layoffs. The President’s plan also encourages states to offer and require unemployed workers to take subsidized jobs while retaining some UI benefits. The reemployment reforms are worthwhile as good examples of low-cost provisions that can have a high payoff.With the nation’s unemployment problem finally reaching center stage, both the President and the Congress seem to recognize the urgency of spurring job growth. But our deficit and long-term debt problems are on that stage too, so steps to reduce unemployment must be cost-effective, well-targeted, well-implemented, well-administered, and work in both the short and long terms. We should not skimp on administration, since effective implementation is critical. Still, even providing for a generous implementation budget, the five initiatives explained here would create well over 4 million jobs at a likely budgetary cost of about $50 billion. That’s a bargain compared to the President’s proposal to spend $448 billion to generate as many as 2.1 million jobs.
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