By my count, the president used the word “jobs” 23 times in his State of the Union address. This emphasis is understandable. Last year the unemployment rate topped 10%, the nation’s highest rate since Ronald Reagan’s first term. Employment fell almost every month in Obama’s first year in office after shrinking for the last 13 months of his predecessor’s term. After reaching a peak in December 2007 employment in the private sector shrank by more than 7.3 million - or 6.3% - through December 2009.
The public, the Congress, and the president are unhappy with this record. What did the president propose to do about it?
He asked for $30 billion to induce community banks to lend to small businesses. He proposed eliminating capital gains taxes on small businesses, presumably on the long-term profit business owners obtain when they sell part or all of their business. He asked for a change in the tax code to encourage big and small businesses to invest in plant and equipment this year rather than at some point in the more distant future. He urged the government to accelerate and increase public infrastructure investments. And he recommended a change in the corporate tax code to discourage U.S. companies from exporting jobs. The details of these proposals were unspecified, so we will have to wait to make a judgment of their likely effects.
Most listeners probably asked themselves, “Is this enough?” My guess is that the proposals, even if they are as successful as their architects hope, will have a comparatively small impact on job creation in the next couple of years. The nation currently needs an additional 8½ million jobs to bring the unemployment rate down to 4½%. The proposals outlined in the president’s speech will not make a big dent in the gap between the number of jobs we have and the number we need. This doesn’t mean the ideas are not worth adopting. It simply means they won’t go far toward eliminating the current job shortage.
The president was right to highlight the steps taken in the past 16 months to strengthen financial markets and boost the broader economy. He emphasized the rescue of big financial institutions. Few experts would disagree with him that this rescue, by keeping credit markets functioning, was decisive in limiting the economic fallout from the financial crisis. The economy-wide effects of the crisis have been appalling, but history suggests they would have been much worse if a number of the biggest financial institutions had failed simultaneously. It is dismaying so little progress has been made toward fixing the regulatory system that helped create the crisis. Nonetheless, it’s obvious that investors have greater confidence in big banks today than they did one year ago.
The president rightly defended the stimulus package Congress passed last February. The stimulus badly needs defending. The public’s opinion of the stimulus package was not very high last summer, and it has declined since then. A CNN poll in mid-January showed that about three-quarters of Americans believe that half or more of the stimulus spending has been wasted. Forty-five percent think “most” or “nearly all” of the stimulus dollars have been wasted.
The public’s view is puzzling. If someone has “wasted” stimulus dollars it is not the government, it is the private citizens (and poll respondents) who received most of it. In its analysis of the stimulus package last spring, the CBO estimated that $584 billion of the funds will be spent through the end of September of this year. Almost two-thirds of this extra spending will be reflected in higher household income, either as tax reductions or as benefit increases (for example, for extended unemployment benefits, increased scholarship assistance, and subsidies to laid off workers so they can continue their health insurance). More than 40% of stimulus spending has been in the form of tax cuts, which, as the president noted last night, were received by 95% of working families.
Most of the remainder of stimulus funds has gone (or will shortly go) to state governments as fiscal relief. This relief is mainly targeted on state medicaid and education budgets. In fact, however, the federal stimulus dollars allowed states to avoid cutting public services or boosting state taxes as much as they otherwise would have done. Does this aid to states represent “waste”? Only if spending on state and local services is wasteful or if households have wasted the part of their incomes they would otherwise have sent to state tax collectors.
Poll respondents seem oblivious of the fact that most stimulus dollars have been spent on lifting their after-tax incomes. Measured in constant dollars Americans’ per capita private incomes fell almost 6% after the end of 2007. At the same time, the net worth of households also fell dramatically. To an extent few people seem to recognize, federal government programs and stimulus dollars have cushioned this massive blow to family finances. Per capita disposable income has fallen less than 1 percent since the start of the recession. Reduced federal taxes and increased government benefit payments, partly funded out of the stimulus package, have kept Americans’ spendable incomes from falling as fast as their private incomes. If the stimulus dollars have been “wasted,” it is American households who have been doing most of the wasting.
I along with most economists think the extra federal dollars received by households and state governments are spent relatively quickly. This spending helps keep some people employed who otherwise would have lost their jobs. Household consumption has fallen proportionately far more slowly than private household income. One reason consumption fell more slowly than private income is that higher government benefits and reduced federal taxes protected families against part of their loss of wage and capital income.
The recession has been severe. Unemployment has risen more steeply than in any period since the Great Depression. The president correctly identified the policies that have prevented the recession from metastasizing into a depression. Unfortunately for the president, “It could have been worse!” is not a very satisfying rallying cry.