The possibility of major parts of President Obama’s $447 billion jobs bill becoming law, and of further steps next week by the Federal Reserve, have forecasters saying that the decisions Washington makes in the weeks ahead could have a substantial effect on economic growth and unemployment. At a minimum, the stimulus could be insurance against the headwinds blowing from Europe’s debt crisis and the impact of the recent government spending cuts in this country.
The jobs package of tax cuts and spending initiatives could add 100,000 to 150,000 jobs a month over the next year, according to estimates from several of the country’s best-known forecasting firms; the potential Fed actions could add 15,000 more jobs a month over two years.
While those estimates are difficult to verify, the nation’s economy since April has added an average of only about 40,000 jobs a month, raising concerns about a double-dip recession.
It remains uncertain, of course, what Congress or the Fed will do and, if they do act, whether their actions will have the intended effects.
Many businesses and consumers remain sufficiently scarred by the financial crisis and long economic slump that they are awaiting clear evidence of a recovery before beginning to spend and hire at a healthy pace again. And Congressional Republicans, after initially expressing openness to the jobs plan, turned sour when Mr. Obama on Monday proposed to offset its short-term costs with future tax increases on wealthy taxpayers.
But the economy’s weakness, as well as polls showing low approval ratings for both Mr. Obama and Congressional Republicans, seem to have raised the prospects of a policy response.
That is a significant shift. Earlier this year, the Federal Reserve chairman, Ben S. Bernanke, said he was not inclined to take more steps to help growth, out of a belief that a recovery was solidly under way. And the new House Republican majority and Mr. Obama had spent much of the year negotiating spending cuts to reduce deficits.
But economists and bond investors have grown increasingly critical of those cuts, warning of a repeat of 1937, when government austerity helped caused a double-dip recession. Moody’s Analytics has estimated that the current fiscal policy would subtract 1.7 percentage points from gross domestic product next year. State and local cuts have eliminated 259,000 jobs this year.
“If you look at the state of the economy, we want — we need — the policy makers to be very proactive, and that means both fiscal and monetary policy makers,” said Krishna Memani, director of fixed income and a senior vice president at Oppenheimer Funds. “If we don’t do that, the drag from fiscal contraction in 2012 will become very, very acute.”
More than half of Mr. Obama’s $447 billion jobs package consists of extending and expanding payroll-tax cuts for individuals and businesses, and those cuts have among the best chance of winning Republican support.
The administration’s main goal is to increase demand for goods and services — the lack of which appears to be the economy’s central problem — which could then give employers the confidence to hire. Most of the rest of the plan is for assistance to the long-term unemployed, which would also put money in people’s hands, and infrastructure spending, which would have a more direct impact on job creation.
While the plan also includes a tax credit for businesses that increase their payrolls, its direct impact on hiring is likely to be small, economists say. Macroeconomic Advisers, which was founded by Laurence H. Meyer, a former Fed governor, did not even include the tax credit in its analysis because it saw the effect as being so “modest.”
In all, the firm projected that the plan would add roughly 1.25 percentage points to gross domestic product and create 1.3 million jobs in 2012. JPMorgan Chase estimated that the plan would increase growth by 1.9 points and add 1.5 million jobs. Most bullish is Moody’s Analytics, which forecast that the package would add 1.9 million jobs, cutting the unemployment rate by a point, and increase growth by two percentage points.
The proposal “would help stabilize confidence and keep the U.S. from sliding back into recession,” Moody’s said. Congress will not pass many of the proposals, it predicted, “but the most important have a chance of winning bipartisan support.”
Fed officials will consider several options when the central bank’s policy-making committee meets for two days next week. The leading contender is a plan to shift the composition of the Fed’s $2.6 trillion investment portfolio, selling short-term Treasury securities and using the money to buy longer-term securities.
If it works, the shift should modestly cut credit costs for businesses and consumers. Macroeconomic Advisers estimated that the Fed could raise gross domestic product by about 0.4 percentage points over two years, increasing jobs by about 350,000 over the same period.
An impact of that magnitude would be roughly the same as the Fed achieved through its recently-completed purchase of $600 billion in Treasury securities, popularly known as QE2.
Under the new plan, the Fed would be absorbing more risk for each dollar it invests; 10-year Treasury securities are riskier than one-year securities because the investor makes a longer commitment. By shifting its portfolio, the Fed would seek to drive investors into even riskier assets, reducing borrowing costs.
Charles Evans, president of the Federal Reserve Bank of Chicago, said in a speech in London last week that the central bank had an obligation to ratchet up its efforts. With an unemployment rate of 9 percent, he said, Fed officials should be “acting as if their hair was on fire.”
But Richard Fisher, president of the Federal Reserve Bank of Dallas, said Monday that the Fed already had “filled the gas tanks of the economy,” that he doubted its ability to do more, and that the responsibility now fell on the rest of the government.
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