The Obama “Jobs” Stimulus Plan and History of Job Growth in the U.S. Economy
Complete details of the American Recovery and Reinvestment Plan (ARRP) of the Obama administration are not published as yet. Information made available so far focuses only on “job creation” aspects in the plan authored by Romer and Bernstein. What does history tell us about job growth? How does the Obama plan compare with history? The following discussion tries to answer these questions.
The bill for the stimulus package is around $775 billion over a period of approximately two years, which works out to roughly 3.0% of GDP per year. The recovery package projects an increase in real GDP by 3.7% during 2010 and a gain of about 3.675 million jobs (created or saved) by the fourth quarter of 2010. Chart 1 illustrates the impact on jobs with and without the implementation of the recovery plan according to the Romer-Bernstein report. The unemployment rate is expected to reach 7.0% by the end of 2010 if the recovery plan is implemented vs. an 8.8% rate if the plan is not enacted. The unemployment rate was 7.2% in December 2008, which is close to the projected mark of the plan for the final months of 2010.
The stimulus plan of the Obama administration aims to create 3-4 million jobs by the end of 2010, which is in roughly two years, with a larger gain in the second year. On an annual basis, about 1.5 million jobs have been created, on average, each year during 1940-2008. The median job growth in this period is 1.74 million jobs. Excluding the long stretch of the 1990s job expansion yields similar statistical measures. The largest number of jobs created in a given year (annual basis) was in 1984 (4.25 million jobs) and with the 4.23 million tally in 1978 in second place. The longest stretch when jobs grew rapidly by over 2 million per year was during 1993-2000 (see chart 2). Job gains during 1984-89 were also noteworthy.
Simulation results cited in the plan indicate that 30% of the jobs created will be construction and manufacturing followed by retail trade and leisure and hospitality. These sectors made up about 36% of total employment of the U.S. economy as of December 2008. Additional details about how much employment growth is likely in each sector are in the above cited document.
Stepping aside from details, these are the questions/observations about the Obama Jobs Plan:
- Robust job growth occurs during the middle-to-latter periods of an economic expansion (see chart 2). An expansion of payrolls is expected to emerge as the economy pulls out of a recession. In other words, the ARRP plan aims to accomplish the task at the onset of a recovery due to an expansionary fiscal policy -- reasonable but it errs on the side of optimism in terms of the projected size.
What will carry economic momentum going forward after 2010 when there is no stimulus plan in place? A case in point is the tax relief of 2008 which provided only a brief and small lift to GDP growth. Ripple effects of the expansionary fiscal policy are assumed to play a role. This is a big unknown factor.
The gargantuan mortgage default and foreclosure problem needs to be addressed adequately to get the economy rolling. We are waiting for details on this front. The credit and economic problem cannot be solved without a resolution of housing market issues. There are several programs in place but the inadequacies of these programs are frequently featured in the press.
The gargantuan mortgage default and foreclosure problem needs to be addressed adequately to get the economy rolling. We are waiting for details on this front. The credit and economic problem cannot be solved without a resolution of housing market issues. There are several programs in place but the inadequacies of these programs are frequently featured in the press.The credit machine needs to resume working. An update on credit conditions via the Senior Loan Officer’s survey of the Fed will be available in early-February. For now, both short-term and long-term market spreads are narrowing.
Authorities know that a plan of action is necessary and much has been done and more is under consideration. But, the game plan to get the economy back on track has been and is most likely to continue as a trial and error process because there is no blueprint to guide the type of ongoing economic crisis.
