Economists Show Support for Obama Job-Growth Plan


WASHINGTON (AP) – A tentative thumbs-up.

That's the assessment from economists, who have offered mainly positive reviews of President Barack Obama's $447 billion plan to stimulate job creation.

Some predict it would put hundreds of thousands of people back to work next year, mainly because a Social Security tax cut for workers would be deepened and extended to small businesses.

"Payroll tax cuts are very powerful," says Allen Sinai, chief economist of Decision Economics. "They provide a boost to direct income and, in turn, spending, which is important to growth."

Mark Zandi, chief economist at Moody's Analytics, estimates that the president's plan would boost economic growth by 2 percentage points, add 2 million jobs and reduce unemployment by a full percentage point next year compared with existing law.

The heart of Obama's plan is an expansion of the Social Security tax cut, which took effect this year and is scheduled to expire by year's end. The tax cut now applies only to workers; it reduces their Social Security tax from 6.2 percent to 4.2 percent. Employers still pay the 6.2 percent rate.

Obama would renew the tax cut for a year and deepen it: He would drop workers' Social Security tax to 3.1 percent.

Under his bigger tax cut, an extra $1,550 would go to taxpayers earning $50,000 a year. The Social Security tax is imposed on the first $106,800 of taxable income. That means the maximum savings would be about $3,300 for an individual and $6,600 for a couple.

Obama would also halve Social Security taxes for businesses on the first $5 million of their payroll. The White House says 98 percent of U.S. businesses have payrolls below that threshold.

Zandi calls this a "creative" way to help small companies, which have struggled more than larger ones to recover from the Great Recession of 2007-2009. During recoveries, small businesses normally drive job creation.

"Something like this is much needed" for an economy grappling with 9.1 percent unemployment, Zandi says. "The economy is on the edge of recession."

Susan Wachter, a finance professor at the University of Pennsylvania's Wharton School, figures that the Social Security tax cuts alone would add 1 percentage point to economic growth and create 1 million jobs next year.

Michael Hanson, a senior economist at Bank of America Merrill Lynch and a former Federal Reserve economist, predicts similar benefits. He thinks the additional jobs would lower the unemployment rate by nearly half a percentage point in 2012.

Such improvement, while just a start, could put the economy back on a "recovery path," Hanson says.

"You'd see a notable reduction in the likelihood that we would slip into another recession," he says.

The president's plan also takes a shot at long-term unemployment: Companies would get a $4,000 tax break for hiring people who have been unemployed for more than six months. As of August, the government says, 43 percent of unemployed Americans have been out of work for six months or more.

The plan would also extend emergency unemployment benefits; ramp up spending on public works projects; and provide aid to keep state and local governments from laying off teachers. Obama would pay for his program with future budget cuts.

Some economists caution, though, that some factors might blunt the impact of Obama's enlarged Social Security tax cut. For one thing, the tax cut would deliver only a temporary boost. It would expire at the end of 2012. Most economists foresee unemployment remaining high well after next year.

And though consumer spending accounts for about 70 percent of the economy, Michael Mandel, chief economic strategist for the Progressive Policy Institute, is skeptical. He thinks the link between consumer spending and job creation is weaker in an economy like America's that's highly open to foreign goods.

"If the payroll tax cut encourages consumers to buy more (imported) clothing, that's likely to create more jobs overseas than in the U.S.," Mandel says.

In addition, Paul Ashworth, chief U.S. economist at Capital Economics, says many taxpayers might save the extra money from the tax cut rather than spend it.

"In an environment where economic confidence has been almost completely destroyed, there is a risk that both households and small businesses will save a greater proportion of any windfall, particularly if they know the reduction is only temporary," Ashworth says.

The White House plan would also extend emergency unemployment benefits for another year. Economists note that unemployment checks put money in the hands of people who are most likely to spend it immediately.

That spending tends to boost demand for goods and services and give companies more reason to hire. The forecasting firm Macroeconomic Advisers has estimated that an additional year of emergency unemployment benefits would support 200,000 jobs in 2012.

Obama also wants $30 billion to modernize schools, $50 billion for road and bridge projects and a bank that would finance more public works projects.

The president's plan will likely face resistance in Congress. Republicans have opposed further spending and have pushed to reduce the budget and shrink the government.

Still, the Wharton School's Wachter calls Obama's plan a serious proposal that should be politically acceptable "across the board."

Menzie Chinn, an economist at the University of Wisconsin, would favor an even bigger jobs package for an economy that grew at an annual rate of just 0.7 percent in the first six months of the year and didn't add jobs in August.

He says he fears that Obama's plan merely makes up for the expiration of the president's earlier $862 billion economic stimulus plan.

Even so, Chinn says, the measures Obama proposed Thursday night "might prevent the economy from dropping below stall speed" – at which point it would be vulnerable to another recession.

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