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Economists: Obama Jobs Plan Prevents Recession

Wednesday, 28 Sep 2011 07:20 AM

 

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President Barack Obama’s $447 billion jobs plan would help avoid a return to recession by maintaining growth and pushing down the unemployment rate next year, according to economists surveyed by Bloomberg News.

The legislation, submitted to Congress this month, would increase gross domestic product by 0.6 percent next year and add or keep 275,000 workers on payrolls, the median estimates in the survey of 34 economists showed. The program would also lower the jobless rate by 0.2 percentage point in 2012, economists said.

Economists in the survey are less optimistic than Treasury Secretary Timothy F. Geithner, who has cited estimates for a 1.5 percent boost to gross domestic product. Even so, the program may bolster Obama’s re-election prospects by lowering a jobless rate that has stayed near 9 percent or more since April 2009.

The plan “prevents a contraction of the economy in the first quarter” of next year, said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who participated in the survey. “It leads to more retention of workers than net new hires.”

Some 13,000 jobs would be created in 2013, bringing the total to 288,000 over two years, according to the survey. Employers in the U.S. added 1.26 million workers in the past 12 months, Labor Department data show.

Obama’s plan, announced on Sept. 8, calls for cutting the payroll taxes paid by workers and small businesses while extending unemployment insurance. It also includes an increase in infrastructure spending and more aid for cash-strapped state governments.

‘What Happens?’

“The important thing to consider is: What happens if we don’t do anything?” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. He said the program “very well could” forestall a recession in early 2012.

“Most of all, it prevents a serious drag on the economy next year” from current programs expiring, said Brown, who estimates the Obama plan would add 0.5 percent to GDP in 2012.

A reduction in government spending, the end of the payroll- tax holiday and an expiration of extended unemployment benefits would cut GDP by 1.7 percent in 2012, according to JPMorgan Chase & Co. chief U.S. economist Michael Feroli in New York. Instead, the Obama proposal makes up for that potential loss and may add a net 0.1 percent to the economy, he estimates.

State Aid

Tax cuts account for more than half the dollar value of the Obama plan, which also includes $105 billion in spending for school modernization, transportation projects and rehabilitation of vacant properties, according to a White House fact sheet. The proposal includes $35 billion in direct aid to state and local governments to stem dismissals of educators and emergency personnel.

“Some of this is just extending support that was already in place,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “The actual jobs programs themselves, I don’t think that they’re a game-changer.”

She estimates the proposal will add 200,000 new workers, while retaining about 300,000 jobs that might otherwise be lost.

Republican lawmakers in Congress have expressed opposition to parts of the White House legislation. House leaders object to Obama’s plan to cut payroll taxes, saying it would lead to an overly large boost in taxes when the temporary break ended.

Tax Burden

In a memo to House Republicans on Sept. 16, House Speaker John Boehner, Majority Leader Eric Cantor and other leaders detailed several criticisms of the payroll-tax idea. The lawmakers said an added tax burden would result when, under the president’s plan, an extension and expansion of a “holiday” on such taxes for employees and employers would expire in 2013.

Herrmann agreed. “We’re setting ourselves up for a big end to the sugar high in the first half of 2013,” he said.

A majority of Americans don’t believe Obama’s jobs proposal will help lower the unemployment rate, according to a Bloomberg National Poll conducted Sept. 9-12 by Selzer & Co. of Des Moines, Iowa.

“It’s not really going to have anything more than a marginal impact,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It’s just maintaining the status quo: extending the payroll-tax cuts and unemployment benefits. The bulk of the money is going to go to firms that would’ve hired anyway.”

Stanley estimated the program would increase payrolls by 50,000 and add 0.25 percent to GDP next year.

Fiscal Policy

While the White House hasn’t given an estimate of how the proposal would affect GDP, Geithner cited the plan Sept. 24 in an address at the annual meeting of the International Monetary Fund. Without additional near-term support, “fiscal policy in the U.S. will be overly contractionary and the U.S. economy will likely grow below its potential in 2012,” Geithner said.

He said private economists estimate the proposal could increase real economic growth next year by around “one and a half percentage points and create more than 1 million jobs at a critical moment in the recovery.”

In the Bloomberg survey, Goldman Sachs Group Inc. estimated the plan would add 1.5 percent to the economy, while Macroeconomic Advisers LLC said 1.3 percent and UniCredit Research, up to 2 percent.

The U.S. economy faces “significant downside risks,” the Federal Reserve said in a statement on Sept. 21 as it announced a plan to shift $400 billion of its Treasury securities holdings into longer-term debt to bring down borrowing costs.

The world’s largest economy grew 3 percent last year before slowing to a 0.4 percent annual pace in the first three months of 2011, followed by 1 percent in the second quarter, according to Commerce Department figures.

The economy will expand 2.2 percent next year, according to a separate Bloomberg survey of economists conducted Sept. 2 to Sept. 7. The same survey said the unemployment rate would average 8.8 percent in 2012.

--With assistance from Alexandre Tanzi and Kristy Scheuble in Washington. Editors: Gail DeGeorge, Christopher Wellisz

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

© Copyright 2014 Bloomberg News. All rights reserved.

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