Kind of a (Fiscal) Drag

June 17th, 2011 at 1:10 am

When it comes to jobs and the macroeconomy, one thing you want to be worrying about right now is fiscal contraction—the fading of fiscal policies that have been helping to stimulate growth.  (Oh yeah…and that debt ceiling stuff too.)

There’s a good bit of it–fiscal brake pedaling–baked in the cake including the fading of the Recovery Act and continued state budget gaps (states have to balance their budgets, and as I’ve shown, one way they’re doing so is by shedding teachers, cops, etc., including 350K (!) over the past six months).

The impact of those two dynamics will likely shave between one and two points off of real GDP the rest of this year and next.  The basic rule of thumb is that this adds one-half to one percent to the unemployment rate—and at the high end, that’s over a million extra jobseekers.

Of course, it shouldn’t outta have to be that way.  Stimulus is temporary by definition which is as it should be—who’d want to be stimulated all the time?  Temporary spending, even on big tickets like the $800 billion Recovery Act, adds little to the deficit or the growth in the debt once that spending fades.  It’s the permanent stuff that just keeps on giving, deficit-wise, like the Bush tax cuts.

But if plan A fades while unemployment is still way too high and the jobs engine is stuck in first gear, you need a plan B.

In that regard, it’s been good to hear some talk about new measures that could help on the jobs front.  The researchers at Goldman Sachs kindly estimated the impact of these ideas, including the fiscal drag noted above.  The figure shows what they found.

Source: GS Global ECS Research

If everything expires as planned, GDP takes a 1.5% hit by about a year from now.  Remember, this doesn’t mean GDP will be shrinking by 1.5% percent.  It means that instead of growing at 3.5%, for e.g., it will grow 2%.  Which, if those numbers are ballpark, is the difference between unemployment falling a half a point per year or rising 25 basis points (one-quarter percent).

But if we go all in on the stuff some policy makers are starting to consider—payroll tax cuts, unemployment insurance extension—we can bring that loss down to a mere 0.5% of fiscal drag.

Shouldn’t we fully offset the drag and try to get a line in the graph into positive territory?  I like the way you think.  I’m just not sure how many others are thinking like us.

 

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7 comments in reply to "Kind of a (Fiscal) Drag"

  1. foosion says:

    1) >>Shouldn’t we fully offset the drag and try to get a line in the graph into positive territory?>>

    But that would improve the economy, which would increase the chances of Obama’s re-election and would likely increase labor costs to business?

    2) I’d like to be prudent shopper and fix our infrastructure while fixing it is on sale (low interest rate, idle capacity), rather than waiting until it would be more expensive, in addition to payroll tax cuts and extended UI benefits. How about some revenue sharing to offset contraction at the state level, so that we can continue to educate our children, etc.?


  2. Kevin Rica says:

    “If everything expires as planned, GDP takes a 1.5% hit by about a year from now”

    But then why worry about fiscal?

    If you get really tough on the Asian countries manipulating their exchange rates and cut 2% of the current account deficit, for example, that might add 4-6% to GDP without requiring ANY NEW DEFICIT SPENDING.

    But that would take enough imagination for the Administration to read an economics textbook and act!


  3. Virgil Bierschwale says:

    What I have a problem with is each of you experts base your solution on historical precedence.

    Yet none of you will admit that this is happening on our shores.


    The Washington Post summarized the Brookings findings in a front-page report today, and found that some regional employers are increasingly favoring a foreign-born workforce. Some employers may say they prefer immigrants to native-born workers. When Samir Kumar needs to hire employees for his Northern Virginia-based IT business, he often looks overseas. Not only do workers from India and Ukraine have the required training, but their expectations are lower, he said.”

    “They actually don’t demand a very high amount of salary, and the expectations are kind of grounded and they don’t jump around so much” between companies, said the 39-year-old Ashburn resident, an immigrant from India. U.S.-born technology and business analysts are hard to find and hard to retain, he said, while immigrants with the same skills and education “are much easier to manage.”

    http://keepamericaatwork.com/?p=197565
    —-

    And you will yell from the roof tops that we are not educated enough.

    ===

    “It’s like there’s two worlds out there: People who are still working, who are still living the same lives they always had, and I feel like I’m on the other side of a Plexiglass wall looking in,” said Dittmann, who lives in Kansas. “I know I’m not unique. It’s like you can’t get back into that world. It’s very strange.”

    “I think part of it is my age,” he said. “I can’t prove that but I think that’s probably true. I was a business owner before. If you can hire someone in their 40s versus someone in their 50s, the person in their 40s is going to stay with you longer, and the person in their 50s is going to be more expensive because of health insurance. Everybody I’ve talked to that’s in their 50s, looking for a job, they’re getting nowhere.”

    UPDATE 6/15/2011: Dittman, now 57, told HuffPost that even after getting an MBA, he still can’t find work. It’s been more than three years.

    “So far it’s the same old thing. I know it’s because of my age,” he said. “I’ve had maybe two real face-to-face interviews in the whole two years [since speaking to HuffPost in 2009].”

    ===

    Everybody is either bringing in “manageable people” via the H1B plan or sending our jobs offshore, yet there are no quantifiable studies showing how bad it is.

    As for the software types like myself that can no longer find work even though software is a hot commodity, we have identified manageable as willing to work for a below market rate SALARY for up to 16 hours per day which further dilutes your salary and willing to live 10 or more deep to a 3 br apt.

    Can you say Welcome to the American NIGHTMARE?

    And still our political leaders will not get their head out of the sand..


    • Kevin Rica says:

      Right on!

      The whole justification for immigration is that we have a shortage of labor. It was never true and the normal solution to any shortage is raise the price. Except that “Free Market Republicans” and “Liberal Democrats” suddenly abandon their belief systems so that the former can control the price of labor and keep it cheap and the latter can squeeze as many immigrants in to work for low wages.

      Meanwhile, employers looking at the enormous labor surplus, picks and chooses and decides they don’t want most American labor — they’d have to pay health benfits, too much money, they are to young or too old, inexperienced and overqualified, and Americans are too upity.

      And besides, the pundit class is willing to cover by spreading the lie that “Americans won’t do that job — it’s too hard. We need more immigrants!”


  4. John says:

    I see a Bill Maher style rule here, JB: don’t ask Goldman Sachs for data about labor.

    There are 3 factors that this GS graph aggregates:
    – employer-side payroll tax cuts
    – employee-side payroll tax cuts
    – unemployment benefits

    Only the last two would have a high stimulus multiplier, and only the last would help the unemployed.

    Better to raise the employer-side payroll tax, extend unemployment benefits _indefinitely_ until it falls below a target (say 5% or 6%), and eliminate the cap on employee-side contributions to the payroll tax. Otherwise lowering employee-side payroll side taxes, fine, but the other would do more good.

    Nothing – nothing – is going to incentivize additional hiring in this environment, and I don’t mean the recession and the lack of demand – I mean the impact of technology. More hiring will require public hiring where that is the explicit purpose of the hiring. There’s no longer a business case for it, pretty much across the board, so private hiring is not going to pick up soon, if ever.

    The recession – from an output perspective – is over. The thing is, JB, that’s not the only perspective. But if the employment recession continues and deepens, it’s gonna make the output recession worse all over again, and eventually it won’t recover – there will be no consumer market from which demand will flow.


    • John says:

      BTW, if you expect private business to care about the macroeconomic damage their refusal to hire causes, you’re not being realistic. Trust me, they could care less.


      • Michael says:

        It’s not meaningful to expect them to care — the social contract is already shredded, so it’s not like their efforts will be anything other than a drop in the bucket.

        Fordism only works if the country producing the goods is the same as the country consuming them. Once that link is broken, as it was in the mid 70s, the incentives toward looting become far too vast for business culture not to change.


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