INDIVIDUAL TAX CUTS WON’T WORK Rising gas prices and falling confidence have crimped household purchases, effectively preventing the payroll tax cut passed last December from raising consumer spending. Since such headwinds are likely to continue, the president’s proposed expansion of that tax cut won’t be effective.

This argument practically defines the term non sequitur. Other forces may well be depressing consumer spending while tax cuts for households are increasing it. But even if the net result is that consumer spending merely holds steady, it doesn’t follow that the tax cuts are useless. In their absence, consumer spending would likely fall, bringing output and employment down with it.

This discussion raises a legitimate question, however. Given the dismal state of the economy, is the president’s proposal large enough? It may not be. The economy is suffering from a profound shortfall of demand, and most forecasts call for only anemic growth over the next few years. The experts who have looked at the administration’s jobs package estimate it will
most likely raise growth by one to two percentage points. That would certainly help, but an even larger and more sustained package deserves consideration.

WE NEED A HOUSING PLAN, NOT MORE FISCAL STIMULUS The bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homes — we’ll never get the economy going.

The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth.

Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).

History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt.

We should, however, be thinking hard about whether the president’s stimulus plan is the best one for a debt-heavy economy. It may be too tilted toward broad tax cuts, when bigger increases in government investment spending and more targeted tax cuts would promote faster growth.

THE COST PER JOB IS TOO HIGH Martin Feldstein, the Harvard economist, recently combined private estimates that the president’s plan would raise employment by about two million in 2012, with its cost of about $450 billion. His conclusion was startling: each job produced by the plan would cost about $200,000.

This calculation is attention-getting, but it’s misleading. First, many of the jobs would be in 2012, but not all. Infrastructure spending, for example, would be spread out over several years, so the total number of years of employment created over the life of the program would most likely be substantially larger than two million.

More fundamentally, the program wouldn’t just create jobs. Consider the proposed $140 billion for roads, bridges, school repair and teachers. Jobs are, in a sense, a side benefit. What we’re really getting is better infrastructure and more education for our children.

Then there’s the $245 billion in tax cuts. That money doesn’t disappear. It goes to households that can spend it on goods and services, and to businesses that can spend it on research and development and new machines. That added consumption and investment is a benefit, along with the jobs created.

The bottom line here is that we should be discussing which policies are likely to generate the most jobs while being valuable in other ways. We need to try to quantify the benefits of different government investments, and compare them with the benefits of private consumption and investment.

IT’S THE DEFICIT, STUPID People are concerned about the deficit, and this concern is holding back the recovery. Fiscal austerity, not more stimulus, is the answer.

This argument makes me crazy. There’s simply no evidence that concern about the current deficit is a significant factor limiting consumer spending or business investment. And government borrowing rates are at record lows, suggesting that financial markets are not worried about the deficit, either.

Moreover, as I discussed in a previous column, the best evidence shows that fiscal austerity depresses growth and raises unemployment in the near term. That’s the experience of countries like Greece, Portugal and Britain, which have embarked on drastic deficit reduction plans over the last two years. Cut the current deficit and you will raise unemployment, not lower it.

Like many other countries, the United States has two terrible problems: a devastating lack of jobs right now and an unsustainable budget deficit over the longer run. The right question is not whether we can reduce unemployment by lowering the deficit (we can’t), but whether we can make progress on both problems.

With 14 million Americans unemployed and no prospect of rapid recovery on the horizon, we really have no choice: we must take additional measures to create jobs. What policy makers need to discuss is which measures will be most effective in putting people back to work, and in hastening the day when government support is no longer needed.

Just as important, policy makers should be discussing how to make meaningful progress on the long-run deficit at the same time. We need a credible plan that phases in aggressive deficit reduction as the economy recovers.

The president has started a discussion about job creation. His proposal deserves a full debate based on facts, evidence and careful analysis.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

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