Jonathan Goldstein contributed to this post.
In testimony last week before the Senate Budget Committee, Congressional Budget Office (CBO) Director Douglas Elmendorf laid out his organization’s economic projections for the next two years. His remarks and the accompanying report also examine fiscal policies that could aid both growth and employment in the short term.
In addressing the state of the economy, Elmendorf predicted modest growth ? 1.5 percent for 2011 and 2.5 percent for 2012. Although any growth is somewhat welcome news in the wake of rising fears over a double dip recession and trouble in Europe, these sputtering rates are not nearly sufficient to pull the U.S. out of its slump or bring down the current 9 percent unemployment rate.
Elmendorf has repeatedly made the following point: In order to increase employment and spur significant growth, lawmakers should implement policies to boost the economy in the short-run, while also putting in place a plan to restore fiscal sustainability thereafter. The Bipartisan Policy Center (BPC) agrees with and has extensively outlined both components, but this post will concentrate on the former, as it is the focus of CBO’s latest report.
The list of options that CBO scored is divided between those directly affecting households and those targeted at businesses, with a couple additional policies that fall outside of these two categories. The respective goals are to encourage increased consumer spending and to reduce the incremental costs for businesses to hire additional employees. CBO finds that the effectiveness of the policies listed varies widely ? creating between $0.10 and $1.90 of additional growth per dollar of budgetary cost and from 0-19 full-time equivalent (FTE) employment years per million dollars in budgetary costs. None of these options will be a panacea for the economy, but initiating some of the more effective ones and ideas from various other job-creating proposals (such as the American Jobs Act, the House Republican Jobs Plan, the bipartisan Jobs Council, and many think tank submissions) could have a substantial impact.
On the household front, Elmendorf outlined six policies to help individuals deleverage from the recent debt buildup ? a prerequisite for refueling the U.S. economy ? and put more money into the hands of consumers who are likely to spend it. The items range from further extending unemployment benefits to expanding the “patch” on the alternative minimum tax (AMT) that prevents it from hitting middle-class families. CBO also included an employee payroll tax holiday, which was endorsed by BPC’s Debt Reduction Task Force. Although CBO found that some of the other household options produce a bit more bang for the buck, the holiday would be a level of magnitude larger and therefore produce a more substantial economic jolt. Moreover, it is one of few that has received bipartisan support.
CBO estimates particularly strong effects from policies targeted to encourage business hiring. An employer payroll tax holiday, especially one concentrated on firms that increase their payrolls (as BPC proposed recently in its super committee recommendations), is forecasted to provide the biggest boost to job creation and economic growth. This type of fiscal policy gives businesses a strong incentive to increase hiring. CBO projects that a repatriation tax holiday (where corporations can bring back overseas profits at a low tax rate), on the other hand, is a particularly poor catalyst for boosting the economy.
The deadlock in Congress is preventing decisive economic action ? the type of action that is sorely needed. To resolve our debt crisis, we must simultaneously address our jobs crisis.
Both parties want to see stronger economic growth and accelerated job creation, and each has ideas on how to accomplish these goals. While logical action is not always the norm in this town, why wouldn’t a reasonable path forward be to take some ideas from each side that are palatable to the other, and throw the kitchen sink at the current problem? If such a strategy spurs recovery, both parties can then declare victory and each can claim that its ideas were the source of success.