We estimate that the American Jobs Act (AJA), if enacted, would give a significant boost to GDP and employment over the near-term.
- The various tax cuts aimed at raising workers’ after-tax income and encouraging hiring and investing, combined with the spending increases aimed at maintaining state & local employment and funding infrastructure modernization, would:
- Boost the level of GDP by 1.3% by the end of 2012, and by 0.2% by the end of 2013.
- Raise nonfarm establishment employment by 1.3 million by the end of 2012 and 0.8 million by the end of 2013, relative to the baseline.
- The program works directly to raise employment through tax incentives and support to state & local governments for increasing hiring; it works indirectly through the positive boost to aggregate demand (and hence hiring) stimulated by the direct spending and the increase in household income resulting from lower employee payroll taxes and increased employment.
Because the package is some $100-$150 billion larger than the proposal widely reported in the press and that we wrote about two weeks ago, these effects are expected to be significantly larger than previously expected.
This simulation did not incorporate potential incentive effects on employment from the payroll tax credit for new hires.
- Studies have found that such credits do incent increased hiring.
- However, it is difficult to know the employment base of the firms eligible to receive the credit, hence we could not form an estimate of the aggregate employment gain
- That we did not allow for these effects suggests some upside risks to these employment estimates presented here.
Because these initiatives are planned to expire by the end of 2012 — except for the infrastructure spending, which has a longer tail — the GDP and employment effects are expected to be temporary.
- That is, these proposals will pull forward increases in GDP and employment, not permanently raise their level.
- Nevertheless, there may be good reasons to want to implement such programs today, if the government can follow through on the commitment to trim deficits later:
- There remains considerable slack in the economy and nearly all forecasts anticipate only a gradual decline in the unemployment rate over the next couple of years.
- Given the elevated risk of recession the U.S. faces today, additional near-term stimulus reduces that risk.
- Given the deleterious effects of long-term unemployment on an individual’s skills and long-term employment prospects, speeding a return to employment is both individually and socially beneficial.
- With monetary policy’s limited room to lower rates and stimulate demand, there is a role for counter-cyclical fiscal policy.
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