Fiscal Policy to Support Employment

Fiscal Policy to Support EmploymentThe U.S. Experience During the Crisis

Conference on the Promotion of the Global Jobs Pact and Employment

May 20, 2010

Mark ThomaDepartment 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 4th 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 Employment1990:M1 – 2010:M4


The Fall in Real GDP1990:Q1 – 2010:Q1


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 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 Tax Rebates and ConsumptionDid 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 Tax Rebates and ConsumptionDid the Rebates Work?

CBO Estimates


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 2010.

• The stimulus is 2 percent of GDP in 2009, 2½ percent in 2010, and about 1 percent in the years after 2010.

• 37% 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)


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 http://www.whitehouse.gov/sites/default/files/microsites/CEA-3rd-arra-report.pdf


Distribution of Tax Cuts and Transfers


The Effect of Taxes and Transfers on Disposable Income


The Effect of Taxes and Transfers on Disposable Income – cont.


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


Monthly GDP Estimates (from Macro Advisers)

Mar.07

Apr.07

May.07

Jun.07

Jul.07

Aug.07

Sep.07

Oct.07

Nov.07

Dec.07

Jan.08

Feb.08

Mar.08

Apr.08

May.08

Jun.08

Jul.08

Aug.08

Sep.08

Oct.08

Nov.08

Dec.08

Jan.09

Feb.09

Mar.09

Apr.09

May.09

Jun.09

Jul.09

Aug.09

Sep.09

Oct.09

Nov.09

Dec.09

Jan.10

Feb.10

12,700

12,800

12,900

13,000

13,100

13,200

13,300

13,400

13,500

13,600

Billions of chain-type (2005) dollars

October

February

First Stimulus Package

May

Second Stimulus Package


GDP Growth Rates


Estimated Effects of the ARRA on Output and Employment


Estimated Effects of Taxes and Transfers on Output and Employment

• The estimated effects are smaller than above when government spending was included


Additional Estimates of the Effect of the ARRA

• There is quite a bit of similarity across the estimates


Multiplier Estimates from the CBO


FRBSF Estimates of Recovery Trajectory


Effects of the ARRA on Employment

Employment lags output:

Delayed Peaks Is This Time Different?


Unemployment Since 1990

Delayed Peaks in 90-91 and 2001 recessions

Will the Peak be Delayed Again?


The Growth in Payroll Employment


Estimates of the Effects of the ARRA on Employment


Estimate of ARRA’s Effects on EmploymentCumulative 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


Unemployment is Still Too High


Long-Term Unemployment is Still Too High


Employment to Population Ratio is Still Too Low


Private Sector Employment is Still Too Low


Average Weekly Hours in the Private Sector are Still Too Low


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


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


Cross-Country Evidence


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


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


Fiscal Policy to Support Employment

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