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					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   Is This Time
                                                                       Different?




       The Global Jobs Pact and Employment: The U.S. Experience
Unemployment Since 1990



  Delayed Peaks in 90-91                                     Will the Peak be
  and 2001 recessions                                        Delayed Again?




  The Global Jobs Pact and Employment: The U.S. Experience
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:
                                                                    •       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




                 The Global Jobs Pact and Employment: The U.S. Experience
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

				
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