For Obama, it’s all about jobs, jobs, jobs

The president’s 8 September announcement of an employment stimulus plan is exactly the sort of thing

America has a jobs crisis. The major recent economic event in the US was President Obama's address to a joint session of the House of Representatives and the Senate on 8 September, when he set out his new job-creation package, designed to "put people back to work". This is a response to the unemployment rate remaining stubbornly over 9 per cent and private-sector job creation having stalled, adding only 17,000 positions last month - the same as the number of public-sector jobs destroyed. Those working part-time for economic reasons jumped 430,000 in the month.

Growth is slowing. The OECD has slashed its growth forecast for the US; consumer and business confidence remains fragile. Barack Obama realises that his prospects of being re-elected in November 2012 depend on the US economy creating jobs, jobs and more jobs. There is a palpable sense of urgency, that something has to be done - and quickly.

The mark of Krueger

The president's course of action was fairly predictable, given whom he had just appointed as chair of his Council of Economic Advisers: the labour economist Alan Krueger of Princeton University. Krueger's job now is to get unemployment down. Interestingly, the council that he will chair has only one client - President Obama. Some of America's most prominent economists have led the council, including Ben Bernanke, Martin Feldstein, Arthur Okun, Joseph Stiglitz and Alan Greenspan. (David Cameron's naive utterances on economics, documented in this column, suggest that he would benefit from having his own Council of Economic Advisers to help him "up his game". Surely, the first thing such a body would do is stop him drawing false comparisons between the UK and Greece.)

Krueger is a good friend of mine and a great empirical economist. He has written many important articles about how the labour market works, and is a shoo-in for the Nobel Prize in Economics down the road. He cannot take up his appointment officially until he is confirmed by Congress - which he surely will be, as he is eminently qualified and he was confirmed for his earlier job at the US Treasury - but Obama's latest announcement had Krueger's fingerprints all over it. Much of the detail had been leaked beforehand, but the president was always going to pull a surprise - which he did with the scale of the stimulus. It was nearly $450bn, well above the $300bn that had been predicted. The central proposals of the programmeinvolve deep payroll tax cuts and spending on the country's infrastructure, most of which Republicans had touted.

It does remain an open question, though, how much of the bill will be enacted into law. Nevertheless, the sense of urgency on the jobs front makes it quite possible that the Republicans will at least support the payroll tax cuts. Bullishly, Obama has challenged Congress to pass the bill, announcing on 5 September in a speech in the Rose Garden of the White House that he was delivering it to the House that evening and imploring members to pass it immediately, with "no games, no politics, no delays". He then set off around the country to sell it. His first speech was to 8,000 people in Richmond, Virginia, home district of Eric Cantor, the House majority leader and the number-two Republican.

hat are the main components of the plan?

  • A $175bn employee payroll tax holiday that would halve the tax rate to 3.1 per cent in 2012.
  • A $65bn employer payroll tax holiday to encourage small businesses to hire more workers. The proposals include halving employer payroll taxes for the first $5m of a company's wage bill in 2012. Obama also wants a complete payroll tax holiday for increasing the size of the payroll by up to $50m above the previous year, either by hiring new employees or raising the salaries of the existing workforce.
  • $85bn in aid for state and local governments to keep teachers, firefighters and police officers in their jobs and to modernise schools and community colleges.
  • $15bn to rehabilitate and refurbish vacant and foreclosed homes.
  • $5bn to help low-income youths and adult workers, supporting summer and year-round jobs for young people.
  • $50bn to invest in highways, transit, rail and aviation, including upgrading US airports.
  • $10bn to capitalise an infrastructure bank to leverage private and public infrastructure investment "without earmarks or traditional influence", the White House says.
  • $58bn to extend unemployment insurance, along with help for the long-term unemployed.

These are really big numbers. Overall, the proposals could create upwards of two million jobs and give a boost of perhaps 2 per cent to GDP. In the UK, George Osborne has claimed that the US is in an entirely different position from the UK, as the dollar is a reserve currency and can get away with a slower pace of deficit reduction. I don't buy that - and neither does the OECD nor the IMF, both of which have made it clear that it is appropriate to slow the speed of austerity. The bad unemployment numbers suggest that Osborne had better have his own jobs plan "shovel-ready".

Shameful self-interest

In other news, the Institute for Fiscal Studies announced that the UK government's deficit reduction programme will lower living standards by more than 10 per cent over the next three years. Crucially, it found that those on the lowest incomes would also suffer most tax increases and spending cuts. This will inevitably lead to increases in inequality and poverty.

All of this came in the same week as 20 economists argued in a letter to the Financial Times that it was time to lower the 50p top tax rate. They claimed that "the economic damage it causes means that it is against the interests even of ordinary workers who don't pay it".

That is not true. We don't even know at this point how much the tax is raising, or the scale of any such disincentive effects. Shamefully, the move smacks of self-interest. People care about fairness, and the removal of the rate would widen social divisions at a time when most are struggling. Thankfully there were calmer voices, including that of the former Marks & Spencer chairman Stuart Rose, who argued that this was not the right thing to do. It isn't.

David Blanchflower is the NS economics editor and professor at Dartmouth College, New Hampshire, and the University of Stirling