How Congress can improve the economy by November

Via Ezra Klein of the Washington Post:

If elections are dependent on the economy, then the obvious question is what, if anything, can Democrats in Congress actually do to improve the economy between here and November? The answer, even if they had the votes, is probably not that much. But that’s not to say nothing.

First, Congress can pass policies to keep things from getting, or feeling, worse. Unemployment insurance and state and local aid are probably the biggest players here. If unemployment insurance isn’t extended, millions of unemployed Americans will stop getting checks. As angry as they are about the economy now, they’ll be much angrier after Congress deserts them.

State and local aid exists in a similar space: With stimulus funds running dry and states facing a $200 billion shortfall this year, either the federal government has to step in or layoffs are going to get really, really bad. Aid now — or even the promise of aid soon — could prevent a lot of layoffs that states are going to make if they don’t see any fiscal help on the horizon. Another state-related idea I heard was to provide the funding and loosen the rules so unemployed people could get on Medicaid.

The second question for Democrats is whether anyone will notice their efforts. “The Recovery Act has had a very significant impact,” says Jim Horney, an economist at the Center for Budget and Policy Priorities. “You’ve got between 2.5 and 3.5 million people employed. But how many people think, ‘wow, I’m better off?; Things that increase aggregate demand and may have more of an impact can’t be pointed to as easily. That’s why a lot of people thought Democrats should do a jobs tax credit where the jobs it created could be pointed to more easily.”

As Democrats don’t have the sort of time — nor the votes — needed to make a big change in the macroeconomy, they might simply try to put money in people’s pockets. Money, as Horney says, that people notice. The obvious policy, which many Republicans have endorsed in the past, is a payroll tax holiday. For the reasons outlined here, that’s not a very efficient form of stimulus. But if done correctly, it’s a very efficient way for the government to signal that it’s helping people out. The more targeted your tax credit gets — think the Making Work Pay credit from the stimulus — the more bang-for-the-buck you’ll get, but the fewer voters you’ll touch directly.

If Democrats don’t want to go the tax cuts route, they could try for direct employment. Over the next few months, the jobs related to the 2010 Census will continue to expire, leading to 700,000 more people losing work. That was always anticipated: Census jobs are temporary jobs. But those were also real jobs, and their expiration will mean real unemployment. Something like George Miller’s Local Jobs for America Act — which earmarks $100 billion not just to fund state and local budget shortfalls but also to directly employ people — could make up some of the gap.

But the best thing Democrats could do, by far, would be to invent a time machine, travel back to early 2009, and figure out some way to pass a bigger stimulus a year ago. “To measurably move the dial on employment and unemployment by November, there would have to have been action taken at the end of last year or the very early part of this year,” says Larry Mishel, president of the Economic Policy Institute. “At this point, the economic outcome is pretty much set.” And that probably means the election is, too.

Published in: on July 12, 2010 at 9:48 pm  Leave a Comment  

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