TELLA: Jobs - how stimulating

COMMENTARY:

Within a matter of weeks President-elect Barack Obama has proposed three different job targets. His stimulus package initially looked to save or create 2.5 million jobs in two years, which was subsequently raised to 3 million, and now stands at 3 million to 4 million. The latest estimate comes from an analysis by Christina Romer, who will chair the Council of Economic Advisers in the new administration, and Jared Bernstein, who will be chief economic adviser to the vice president.

At this rate, if nothing else, our new president will create more jobs for economists.

The report by economists Ms. Romer and Mr. Bernstein, released January 10, is rigorous and credible and the job estimates plausible, though arguably optimistic.

The authors estimate an unemployment rate of 8.8 percent for fourth-quarter 2010 in the absence of the proposed stimulus, though the president-elect, when he released the report, noted that independent economists have estimated “the unemployment rate could reach double digits.” In that event, the predicted labor market effects of the recovery plan would indeed be optimistic. Under the proposed stimulus package, the unemployment rate is predicted to be 7 percent in two years, slightly less than now.

The stimulus plan - a little more than $775 billion in the report - is estimated to increase jobs by about 3.7 million in two years and add 3.7 percent to gross domestic product (GDP). Unemployment under the recovery plan begins to decline sooner than in the absence of the plan with the stimulus effect wearing out by 2014. Even with the stimulus, by Election Day 2012 the projected jobless rate will still be above its full-employment level, at about 5.5 percent. Now, that’s honest economics.

The report also presents estimates of job creation under the recovery plan by industry (all benefit), the number of created jobs expected to go to women (42 percent of the total), the separate effect of plan components on job creation, and the effect on jobs of different types of spending and tax incentives.

While the report explains how the estimate of stimulus-induced job creation is derived, it does not explain how job creation is translated into lower unemployment. The unmentioned but critical variable in that translation is the labor force participation rate.

So far in the current recession, that rate has hardly budged - down only slightly from a year ago - whereas in past recessions it has shown steeper declines as more of the jobless gave up looking for work and so were not officially counted as unemployed. If, out of desperation or because of the widely publicized employment creation program in the offing, a large proportion of the jobless continue to look for work, the unemployment rate under the stimulus plan will be higher than historical experience suggests and than is projected in the report.

The unstated labor force participation behavior underlying the report’s unemployment estimates and the translation of created jobs into the head-count employment measure used in the calculation of unemployment need to be made available if the stimulus plan is to be fairly evaluated.

The assumption underlying the report’s job creation estimate, that households will treat the tax-cut component of the stimulus plan as permanent in determining their spending, is a stretch. Many consumers will be skeptical of that and their spending will be muted as a result, thus dampening job creation.

In this worst recession of the postwar period, insecurity, uncertainty, caution, the need to pay down debt and the need to prepare for retirement, among other factors, will probably continue to bias householders toward saving, even with the anticipated boost from a stimulus package. To the extent income from a stimulus plan does encourage spending, in the present economic environment consumers will still shop smart and look for the lowest prices, and that means more purchases of imports. In the short run, more money is likely to go abroad than will return. As business improves under the stimulus, many employers, in their search for cheap labor, will offshore jobs.

The promise of more jobs will also likely lure more illegal immigrants across our borders, potentially reversing the slowdown in net immigration in the first year of the recession. Illegal immigrants typically send a large share of their earnings back to relatives in their home country, a transfer that will dampen the positive effects of the stimulus plan.

The recovery package that will soon become legislation is bound to differ in important ways from the president-elect’s present proposal, and one hopes the final plan will address issues not mentioned in the report, such as the problem of illegal immigration and money and jobs going abroad. The new administration economists also need to analyze these issues in their next round of calculations.

Mr. Obama has surrounded himself with a team of talented economists, and there’s every reason to believe they will provide a solid analytical basis for his programs.

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