Berkeley: The United States has just completed its third year of economic recovery, but the unemployment rate remains above 8 per cent, and there are worrisome signs of a slowdown. So it is no surprise that jobs have become a major focus in the presidential campaign — or that the candidates have very different ideas about how to boost employment.

Last autumn, President Barack Obama proposed the American Jobs Act, a $450 billion (Dh1.65 trillion) package of fiscal measures aimed at job creation. The AJA amounted to about 3 per cent of GDP and was designed to take effect in 2012, providing a timely employment boost and insurance for the US recovery against global headwinds. Most of its measures had enjoyed bipartisan support in the past; tax cuts comprised about 56 per cent of the total cost; and the package was paid for in Obama’s long-term deficit reduction plan.

Several independent economists concluded that Obama’s plan would provide a significant lift to the job market in 2012-2013. Indeed, two of the nation’s most respected forecasters predicted that the AJA would add 1.3-1.9 million jobs in 2012 and more than two million jobs by the end of 2013. The non-partisan Congressional Budget Office (CBO) also found that most of the AJA’s policies ranked high in budgetary effectiveness, measured by the number of jobs created in 2012-2013 per dollar of budgetary cost.

The AJA was filibustered by Senate Republicans, and the Republican-controlled House of Representatives likewise prevented the bill from coming to a vote. Mitt Romney, now the Republican presidential candidate, attacked the plan as “mere stimulus” that would “throw a cup of gasoline on the embers” of the recovery. Ultimately, Obama, bolstered by polls endorsing his plan, won partial passage of two AJA policies: a one-third cut in employees’ payroll taxes (he had proposed one-half), and an extension of unemployment benefits by about 60% of what he had recommended.

But Congress failed to approve a 50 per cent cut in employers’ payroll taxes — a business tax cut that many Republicans favoured in the past and that ranks high on budgetary effectiveness. Nor did Congress approve $30 billion in federal grants to states to enable them to employ about 135,000 teachers, police, and firemen, despite strong voter support. Such grants between 2009 and 2011, totalling $130 billion, helped states to maintain vital services and retain the public employees providing them.

Romney opposes more federal money for the states, arguing that “it is time to cut back on government and help the American people.” But teachers, firemen, and police are American people who help other American people. Government employment is falling at the fastest rate since the 1940s, and is now at its 2006 level. If public employment had grown during the last three years at about the same rate as the population, as it did during George W. Bush’s presidency, the unemployment rate would be around 7 per cent rather than 8.2 per cent, owing to about 800,000 additional jobs.

Likewise, Congress failed to approve Obama’s call for $90 billion in additional infrastructure spending, which would have supported about 400,000 jobs, despite the fact that the US has at least $1.1 trillion in unfunded infrastructure needs. Moreover, infrastructure investment not only creates jobs in the near term, but also promotes long-term competitiveness.

Altogether, Congress left at least one million jobs on the negotiating table, holding unemployed workers hostage to the outcome of November’s election.

Meanwhile, in response to persistent media pressure, Romney has unveiled his policies to boost short-term job creation. They are not convincing. Romney says that he would ensure that the US puts more people to work in the energy sector. But, while the oil and gas industry has grown significantly since 2007, it employs fewer than 200,000 people, implying a negligible effect even if employment in this sector doubled in the short run.

And, while Romney says that he would open new foreign markets, Obama has been doing just that, winning passage of three major trade agreements and increasing federal support for US exports, which have been growing nearly twice as fast as they did during the recovery from the 2001 recession. Moreover, Romney’s promise to charge China, America’s third-largest export market, with currency manipulation, and to impose large tariffs on Chinese imports, would almost certainly invite retaliation, causing a decline in US exports and jobs.

Romney would also repeal “Obamacare” — the 2010 health-care reform legislation — because it “is scaring small business from hiring.” But the evidence for this claim is meagre and anecdotal. A recent survey found that most small businesses support the reform. Most businesses, large and small, cite insufficient demand as the primary reason they are not hiring.

Nor is Romney’s promise to enact immediate cuts in federal discretionary spending by an additional 5 per cent likely to boost job growth, as he asserts. When an economy is suffering from high unemployment and weak aggregate demand, spending cuts are contractionary. Romney conceded this point recently, acknowledging that the “fiscal cliff” — the expiration of Bush-era tax cuts at the end of this year, combined with large spending cuts already scheduled to take effect — would push the economy back into recession.

Finally, in addition to extending Bush’s tax cuts, Romney promises an across-the-board 20 per cent reduction in marginal personal-income-tax rates and a significant cut in the corporate rate to encourage businesses to hire more workers. Despite large cuts in marginal income-tax rates at the start of the Bush administration, however, job growth between 2000 and 2007 was half the rate of the previous three decades.

Even if Romney’s new tax cuts strengthened investment and growth in the long run (a debatable proposition that depends on how they are financed), their short-term effect on job creation would be minimal, and they would entail a significant loss of revenue. Indeed, these cuts perform poorly on the CBO’s measure of budgetary effectiveness.

Obama’s proposals to boost job creation are convincing, whereas Romney’s proposals would have little or no effect — and some could even make matters worse. Voters need to know the difference.

 

— Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.