Washington, DC
The clue is in the name. A stimulus is supposed to stimulate, and Obama’s first attempt stimulated nothing more than the American national debt. So he’s trying again, with a $447 billion package (he’s careful not to call it a “stimulus”) in what will probably be his last roll of the pre-election dice. But $245 billion of it would be debt-financed tax cuts. Not sales tax cuts, the type of which Ed Balls is prescribing for Britain. It’s all payroll tax cuts: reducing the tax on jobs in the hope of encouraging more hiring. Given the temporary nature of the tax cuts, I doubt this will be the pre-election silver bullet. But American thinking about he economic recovery is changing, and it’s worth taking stock of the debate – especially as there is all too little fresh thinking going on in Britain.
I’m over in the states right now, trying to learn a little more about the emerging economic debate. The trajectory of the recovery is certainly challenging the Keynsian consensus (as Prof Casey Mulligan is reporting on his indispensible New York Times blog). The Keyensian is all about demand: that if the private sector is spooked, and stops spending, the state should step in with borrowed money and all will be fine. Unemployment, say the Keynsians, is just to do with demand. As Paul Krugman, the champion of the neo-Keynsians, puts it, “it doesn’t matter how much you want a job”. But the trajectory of this recovery (on both sides of the Atlantic) suggests otherwise. Employment rates amongst pensioners are going up, and amongst working-age population they’re going down. Pensioners are healthier than they used to be, so more able to work. Due to the ill health of their pensions, they’re more inclined to. This suggests that the supply of workers is a determining factor – and that recovery is more complicated than just creating demand for workers. We’ve seen similar trends in Britain where job creation has been great, but 90 per cent of the increase in the labour force is accounted for by foreign nationals. (Immigrants tend to have a greater financial incentive to work, as they have fewer welfare alternatives.)
So how do you increase the supply of labour? Cut taxes – and therefore increase the incentives to work. Sweden was the first to cut payroll taxes as a stimulus, but with a crucial difference – its tax cuts were permanent. Obama’s are temporary. The Swedes argued that payroll taxes have to be permanent to have an effect on hiring: businesses are not so short-termist that they plan to hire one year, all the while intending to fire the next. Paul Ryan, the House Budget Committee chairman, later made the same point. Sweden’s tax cut helped it achieve the fastest recovery in Europe. Also, Sweden targeted its cuts at the low-paid, using a tax credit system. Obama’s tax cut is across the board, which I suspect will blunt its impact. (Amusingly, Obama’s conversion to payroll tax cuts means the Congressional Republicans – who were all for them two years ago – are now opposed).
Obama’s stimulus also brings forward a tiny part of emergency welfare reform. Those who have been claiming dole for six months or more would be able to claim for eight weeks while still working. It rolls out the successful “Georgia Works” programme. One of the biggest problems in a recovering economy is having millions snared in the welfare trap – whereby, if they work, they get to keep sometimes as little as a third of the money they earn. Iain Duncan Smith has a plan to spring this trap in Britain, but his Universal Credit will take a decade to put in place. There is an obvious case for a cruder but more immediate solution such as that which Obama proposes. There’s plenty who would be helped by such a move in Britain. Some 4.3m have been on benefits for six months or more, 460,000 of them on Jobseekers’ Allowance (data here).
So will Obama’s latest “don’t-call-it-a-stimulus” have much effect? Moody’s estimates it will add 2 points to GDP growth and cut unemployment by 1 percentage point. Similar claims were made for his last stimulus, mind you, and the economic architects of that stimulus quit the White House soon after.
There is, of course, a limit to economic lessons that Britain can draw from America – especially given that we don’t control our borders so UK demand-led stimulus can simply suck in
continental workers. But Obama’s focus on the supply of workers, rather than just the supply of jobs, is a significant step along the right direction. I hope George Osborne is watching.
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