Academic journal article ABA Banking Journal

The President's Job Creation Plan

Academic journal article ABA Banking Journal

The President's Job Creation Plan

Article excerpt

Various macroeconomic models estimate that the President's proposals to increase spending and cut taxes by roughly $450 billion would raise GDP by 1.3% to 2% in 2012, and only 0.3% in 2013. The same models show increases in employment of up to two million jobs by the end of 2013, with close to a 1.0% reduction in the unemployment rate. The only problem with the estimates (and I have the highest esteem for those who are making them), is that they are based upon historical relationships that have long since broken apart. Hence, they promise more than they can deliver in a post-crisis economy and lead to false expectations for policy makers and the public.

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One good example is the payroll tax holiday for employers. Historically, this had been an extremely effective tool to get employers to hire when the economy was recovering because it lowered the cost of hiring for cash-strapped employers, at a time when demand was on the upswing. Now, however, mid-sized and large firms have lots of cash but little demand. They could hire cheaply, given the excess number of workers who are applying for any job posted, but they don't because they lack confidence in future or current demand.

This is not to say that the President's plan doesn't have merits, or that parts of it wouldn't have some positive impact on employment. …

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