How the Recovery Package Creates Jobs
Effective economic stimulus and recovery measures work by increasing the demand for goods and services at a time when there is insufficient existing demand to keep businesses operating at full capacity and to generate full employment. Measures that increase demand stop the destruction of jobs and begin to put people back to work during times when business and consumer confidence is low and economic activity is spiraling downward. They continue to do so in the early stages of a recovery from a long and deep recession. Many criticisms of the Congressional package reflect a poor understanding of this process.
Some critics, for example, argue that spending on safety net programs like food stamps and unemployment insurance may be justified on humanitarian grounds but does not provide stimulus or create jobs in the way that reductions in, say, taxes for businesses would. In fact, this argument is completely backward in a recession. When the problem is that businesses have excess productive capacity and can’t sell everything they can make, the way to reduce pressure on them to lay off workers and to give them a greater incentive to expand is to give their customers more money to spend. When you increase benefits for unemployed workers or food stamp recipients, they spend the money quickly and the benefits spread through the economy. That’s what creates incentives for businesses to preserve and create jobs in a recession. Whatever the merits of business tax cuts as a long-term strategy to promote economic growth, they are an ineffective policy when what is needed is to put more customers in the stores.
Some critics also argue that providing additional resources in areas such as child care, Pell Grants, or health services may be good long-run policy but will not help generate jobs. This, too, is mistaken. Programs that serve useful purposes and can spend additional resources relatively quickly boost demand and save or create jobs. Take child care, for example. If states can enroll more children who need child care while their parents are working, looking for work, or in school upgrading their skills, that will expand the number of teachers, aides, food service workers, and custodial staff employed in child care facilities around the country (many of which are small businesses that are so often talked about in the stimulus debate). More children in child care also translates into higher demand for classroom materials and transportation services. The teachers and others who have jobs as a result of the expansion in the child care program will have steady paychecks and be able to purchase more goods and services for their families.
Critics are similarly confused about fiscal relief measures for cash-strapped states. Here, too, some critics have mistakenly charged that such measures are not stimulus and do not create jobs.Brooks, for example, seems to think that such measures provide a boost to existing state budgets that exceeds what governors can absorb. The truth is quite different. In an economic downturn, states see their revenues fall off and their caseloads for social safety net programs like Medicaid increase. Unlike the federal government, states have balanced budget requirements for their operating budgets. As budget deficits begin to emerge, states must take actions to cut existing programs or raise new revenues.
Those actions translate into layoffs of state workers, cancellation of contracts with vendors, and a diminished response to the hardship that beneficiaries of safety net programs experience. Without help from the federal government, those state actions will reverberate through the economy, adding to the job losses and further weakening economic activity. States currently face budget shortfalls projected at more than $350 billion over the next 2½ years, a stunning amount that, in the absence of federal relief, would translate into budget cuts and tax increases that would make the recession longer and deeper. Far from exceeding what states can handle, the state fiscal relief provisions of the recovery package make up only a part (about half) of this gap.[5] State fiscal relief thus will reduce the job losses and reduction in economic activity that otherwise would take place, but will not prevent states from having to make tough budget choices to address the substantial budget gaps that remain.
One of the main provisions for providing fiscal relief to states is a temporary increase in the Federal Medical Assistance Percentage (FMAP), which increases the share of state Medicaid expenses that the federal government pays. Some critics may have this in mind when they criticize the package for increasing entitlement spending rather than providing “real” stimulus. But that criticism is misplaced and reflects a misunderstanding of how the provision would work. By temporarily assuming some of the cost of Medicaid, the federal government allows states to continue to meet their Medicaid obligations without cutting other programs more deeply, avoiding the job losses and other adverse economic effects that would entail.
Properly understood, the bulk of the provisions in the recovery package contribute to job creation and preservation. In many cases, however, it will not be meaningful to try to trace a link between specific measures and specific jobs created. Money that is spent by food stamp or unemployment insurance recipients, by state employees who keep their jobs because of state fiscal relief, or by employees of firms doing business with the state who keep their jobs for the same reason – all of this creates additional demand for a wide variety of goods and services that preserves and protects jobs broadly through the economy. Using standard methods of analysis, Obama Administration economists estimate that more than half the jobs that a package similar to the Congressional recovery package would create would arise from these indirect effects, as the package’s boost to demand multiplies through the economy.[6]
http://www.cbpp.org/2-5-09bud.htm
