Download Fiscal Policy

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 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 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 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)
The Global Jobs Pact and Employment: The U.S. Experience
ARRA Outlays to Date
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
• The biggest impact was in the first quarter of 2010
• Illustrates implementation lags in fiscal policy
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)
Billions of chain-type (2005) dollars
13,600
13,500
February
13,400
13,300
13,200
First Stimulus Package
13,100
May
13,000
12,900
12,800
Second Stimulus Package
12,700
Mar.07
Sep.07
Mar.08
Sep.08
Mar.09
Sep.09
O
ct
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 Peaks
The Global Jobs Pact and Employment: The U.S. Experience
Is This Time
Different?
Unemployment Since 1990
Delayed Peaks in 90-91
and 2001 recessions
The Global Jobs Pact and Employment: The U.S. Experience
Will the Peak be
Delayed Again?
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:
•
•
•
The Global Jobs Pact and Employment: The U.S. Experience
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
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