Fiscal Policy to Support Employment The U.S. Experience During the Crisis Conference on the Promotion of the Global Jobs Pact and Employment May 20, 2010 Mark Thoma Department of Economics University of Oregon

Monetary Policy Alone was Not Enough In response to the crisis, the Fed cut interest rates to zero in the 4 th quarter of 2008 The Fed instituted many special facilities, loan programs, and policies, e.g. quantitative easing These measures were not enough to turn the economy and employment around The U.S. was stuck in a liquidity trap The Global Jobs Pact and Employment: The U.S. Experience

The Decline in Employment 1990:M1 – 2010:M4 The Global Jobs Pact and Employment: The U.S. Experience

The Fall in Real GDP 1990:Q1 – 2010:Q1 The Global Jobs Pact and Employment: The U.S. Experience

There were Two Fiscal Policy Interventions The Bush Economic Stimulus Act passed in February 2008, and enacted in the Spring and Summer of that year The Obama American Recovery and Reinvestment Act passed in February 2009, and enacted later that year The Global Jobs Pact and Employment: The U.S. Experience

The Bush Economic Stimulus Act of 2008 This was a $152 billion program that sent tax rebates to approximately 130 million people. The rebate was $600 for most individual taxpayers and $1,200 to married taxpayers filing joint returns. There was also tax credit of $300 per child. The rebates had income caps of $75,000 for individuals and $150,000 for couples. The Global Jobs Pact and Employment: The U.S. Experience

The Tax Rebates and Consumption Did the Rebates Work? The tax rebates were mostly saved (67%) This was expected since the rebates were temporary. There was little effect on employment But balance sheet rebuilding may not be so bad in a balance sheet recession The Global Jobs Pact and Employment: The U.S. Experience

The Tax Rebates and Consumption Did the Rebates Work? CBO Estimates The Global Jobs Pact and Employment: The U.S. Experience

The Obama American Recovery and Reinvestment Act of 2009 This program provided $787 billion of fiscal stimulus, with most of the stimulus occurring in 2009 and The stimulus is 2 percent of GDP in 2009, 2½ percent in 2010, and about 1 percent in the years after % is in the form of tax cuts ($288 billion) 18% is allocated to state and local government relief ($144 billion). More than 90% of the state aid is going to Medicaid and education 45% is allocated to federal social programs and federal spending programs ($357 billion) The Global Jobs Pact and Employment: The U.S. Experience

ARRA Outlays to Date The biggest impact was in the first quarter of 2010 Illustrates implementation lags in fiscal policy Source: Recovery Act Third Quarterly Report - Progress of Spending and Tax Reductions at The Global Jobs Pact and Employment: The U.S. Experience

Distribution of Tax Cuts and Transfers The Global Jobs Pact and Employment: The U.S. Experience

The Effect of Taxes and Transfers on Disposable Income The Global Jobs Pact and Employment: The U.S. Experience

The Effect of Taxes and Transfers on Disposable Income – cont. The Global Jobs Pact and Employment: The U.S. Experience

Did the American Recovery and Reinvestment Act Work? Look at effects on output, then employment To assess whether it has worked, need a baseline (what would have happened without policy) What is the baseline? We don’t know, it must be estimated Estimates are model dependent The Global Jobs Pact and Employment: The U.S. Experience

Monthly GDP Estimates (from Macro Advisers) The Global Jobs Pact and Employment: The U.S. Experience

GDP Growth Rates The Global Jobs Pact and Employment: The U.S. Experience

Estimated Effects of the ARRA on Output and Employment The Global Jobs Pact and Employment: The U.S. Experience

Estimated Effects of Taxes and Transfers on Output and Employment The estimated effects are smaller than above when government spending was included The Global Jobs Pact and Employment: The U.S. Experience

Additional Estimates of the Effect of the ARRA There is quite a bit of similarity across the estimates The Global Jobs Pact and Employment: The U.S. Experience

Multiplier Estimates from the CBO The Global Jobs Pact and Employment: The U.S. Experience

FRBSF Estimates of Recovery Trajectory The Global Jobs Pact and Employment: The U.S. Experience

Effects of the ARRA on Employment Employment lags output: Delayed PeaksIs This Time Different? The Global Jobs Pact and Employment: The U.S. Experience

Unemployment Since 1990 Delayed Peaks in and 2001 recessions Will the Peak be Delayed Again? The Global Jobs Pact and Employment: The U.S. Experience

The Growth in Payroll Employment The Global Jobs Pact and Employment: The U.S. Experience

Estimates of the Effects of the ARRA on Employment The Global Jobs Pact and Employment: The U.S. Experience

Estimate of ARRA’s Effects on Employment Cumulative Effects of Policy Options on Employment in 2010 and 2011, Range of Low to High Estimates Policies that would have the largest effects on output and employment in 2010 and 2011 per dollar of budgetary cost: Those that can be implemented relatively quickly Those that can be targeted toward people whose consumption tends to be restricted by their income For example, reducing payroll taxes for firms that increase payroll or boosting aid to the unemployed The Global Jobs Pact and Employment: The U.S. Experience

Unemployment is Still Too High The Global Jobs Pact and Employment: The U.S. Experience

Long-Term Unemployment is Still Too High The Global Jobs Pact and Employment: The U.S. Experience

Employment to Population Ratio is Still Too Low The Global Jobs Pact and Employment: The U.S. Experience

Private Sector Employment is Still Too Low The Global Jobs Pact and Employment: The U.S. Experience

Average Weekly Hours in the Private Sector are Still Too Low The Global Jobs Pact and Employment: The U.S. Experience

Is More Stimulus Needed? GDP: Things are looking better, but a double dip or very slow return to trend for GDP is not out of the question Employment: As we’ve just seen, the recovery of employment is likely to be even slower than the recovery in GDP More stimulus, especially if it generates jobs quickly, is needed and would likely boost the recovery. But we needed it six months ago, given lags, it’s hard to justify now In any case, another stimulus package is unlikely The Global Jobs Pact and Employment: The U.S. Experience

Other Evidence? Countries with larger stimulus packages grew faster in 2009Q2 States that spent more lost fewer jobs Cash for Clunkers Incentives to purchase new homes The Global Jobs Pact and Employment: The U.S. Experience

Cross-Country Evidence The Global Jobs Pact and Employment: The U.S. Experience

What Could We have Done Better? Stimulus not large enough Poorly timed, nearly too late Too many tax cuts, not enough spending, temporary tax cuts don’t have a large impact on aggregate demand Better targeting of tax cuts to increase the impact Too afraid of “make work” programs, i.e. too much concern with justifying spending based upon contribution to long-run growth Need third stimulus to help employment, but won’t get it, there’s too much worry about the deficit State and local governments needed a lot more help than they received The Global Jobs Pact and Employment: The U.S. Experience

Conclude Some evidence that fiscal policy has worked But the effects have been mainly on GDP, employment has lagged behind Better, larger policy might have produced a better outcome Direct targeting of employment would have helped Speed of recovery and, importantly, employment would likely improve with more stimulus Politically unlikely The Global Jobs Pact and Employment: The U.S. Experience