Five job creation policies for handling the fiscal obstacle course and slowing deficit reduction

Piggybacking on my earlier post, this post outlines the five job creation proposals in our new paper, Navigating the fiscal obstacle course, which offers policymakers a realistic blueprint for moderating the pace of deficit reduction to boost growth and employment. These job creation policies are also adopted in a comprehensive federal budget proposal that EPI will release on Friday as part of the Peter G. Peterson Foundation 2012 Solutions Initiative.

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

Relative to current policy, our paper recommends investing roughly $600 billion over the next decade, mostly over the next three years, in emergency unemployment benefits, aid to state governments, infrastructure investment, investing in teachers and school modernizations, and a one-year targeted tax rebate.1 These are all cost-effective ways to boost demand, and EPI endorsed variations of each of these proposals in our Sept. 2011 paper Putting America back to work: Policies for job creation and stronger economic growth. Note that any purported “resolution” of the fiscal obstacle course (e.g., a “grand bargain”) that omits these or similar proposals for increasing near-term budget deficits relative to current policy unequivocally fails the challenge actually facing policymakers, which is to sustain and accelerate the recovery.

Emergency Unemployment Compensation

We propose restoring the Emergency Unemployment Compensation program to again support up to 99 weeks of benefits in high unemployment states and continuing the program over 2013—2015. Emergency unemployment benefits are one of the most efficient forms of economic support, generating $1.52 in economic activity for every dollar in benefits (according to Moody’s Analytics) but they also help ameliorate the long-term unemployment crisis. As of Oct. 2012, 5.0 million Americans had been out of work for more than half a year (more than 40 percent of all unemployed workers). In spite of this labor market distress, Congress recently reduced the maximum duration of unemployment compensation from 99 weeks to 73 weeks in most high unemployment states, and extended benefits are slated to terminate at the end of 2012. Extended unemployment benefits should be available until the jobs crisis has abated, period.

Aid to state governments

We propose providing $50 billion in direct fiscal relief to distressed state governments in 2013, $40 billion in 2014, and $30 billion in 2015. State fiscal relief can be easily implemented through block grants and the formula for federal Medicaid funds, and aid to state governments demonstrates a high bang-per-buck of $1.31. The Center on Budget and Policy Priorities estimates that states have experienced cumulative budget shortfalls of $540 billion over fiscal 2009—2012, with another $55 billion shortfall projected for fiscal 2013.2 The Recovery Act provided some state fiscal relief—now long depleted—and state and local government spending cuts have dragged at GDP growth for the past 12 consecutive quarters. State and local government employment has fallen by 605,000 jobs from its peak, and roughly another 2.3 million jobs would exist today without state and local government austerity, with roughly half those jobs in the private sector.

Infrastructure investment

We propose investing in the immediate surface transportation priorities, infrastructure bank, and expanded surface transportation reauthorization bill proposed in President Obama’s fiscal 2013 budget (modified to finance twice as much—$100 billion—in immediate priorities), increasing investments by $234 billion over the next decade. Infrastructure spending is particularly cost-effective in boosting demand in a depressed economy, presently yielding a bang-per-buck of $1.44. Investments also increase the productive capital stock, laying the foundation for long-run growth. The American Society of Civil Engineers estimates that $2.2 trillion of investment is needed over five years just to improve the condition of the United States’ infrastructure from “poor” to “good,” but only half of this need is expected to be met. The federal cost of financing investments is also near-record lows, whereas further deferring maintenance increases net-present-value costs to taxpayers, because upkeep and rehabilitation is cheaper than replacing defunct infrastructure.

Investments in teachers and schools

We propose investing $30 billion in modernizing schools and providing states and local governments with $25 billion to rehire teachers over 2013—2015, adopting sound proposals from the president’s American Jobs Act. The backlog of deferred repairs to our schools exceeds $270 billion. Funds to bring schools up to fire code, replace leaky roofs, improve HVAC systems, repair structures, and undertake energy retrofits could be distributed to school districts through the federal elementary and secondary education grant program, as EPI previously proposed with the Fix America’s Schools Today (FAST!) job creation program. The strain on local budgets has also resulted in a “teacher gap” of 315,000 jobs after accounting for layoffs and unmet hiring needed to keep up with population growth. And as noted above, the “bang per buck” for infrastructure investments and state budget fiscal relief are quite high.

Targeted tax rebate

We propose enacting a one-year, $53 billion targeted refundable tax rebate to cushion the expiration of the payroll tax cut for lower– and middle-income households in 2013. Tax cuts’ impact on near-term demand depends entirely on how well they are targeted toward households likely to quickly spend an extra dollar of disposable income. The payroll tax cut is more stimulative than marginal income tax rate reductions because all working households pay the payroll tax and flat payroll taxes are more regressive than income taxes. The payroll tax cut, however, is less targeted than the Making Work Pay tax credit it replaced and on net actually increased taxes on lower-income households while giving new tax cuts to upper-income households. A targeted refundable tax rebate would more efficiently pump money into the economy.

As detailed in our paper, these proposals are intended to work within the perceived political constraints of reshuffling the fiscal obstacle course components, as opposed to restoring full employment. Again, we’re nowhere near the limits of effective fiscal stimulus, and targeting full employment would require closer to $700 billion of deficit-financed stimulus in 2013 alone, relative to current policy, with additional spending in subsequent years to avert another sharp fiscal contraction like that facing Congress today. Policymakers could scale up any of these five job creation proposals to further accelerate recovery and lower unemployment.


1. Our paper also recommends that Congress and the Administration prevent the Budget Control Act’s automatic “sequestration” spending cuts from taking effect and maintain the Recovery Act’s expansions of refundable tax credits. These policy outcomes, however, are assumed in the current policy baseline from which all proposals are analyzed, so we do not score these recommendations as creating jobs, unlike the five policies outlined here.

2. These refer to state fiscal years, which typically start July 1, whereas the federal fiscal year starts Oct. 1.