Solving the jobs deficit while lowering the government debt burden

Well-known Yale economist Robert Shiller had an opinion piece in the Sunday New York Times arguing for stimulating the job market through balanced budget increases in both taxes and spending on productive public services. (Professor Shiller is known for a number of areas of research, but in particular deserves a great deal of respect for having argued back in 2003 that U.S. housing prices were overvalued.)

The basic idea of Shiller’s piece is familiar to many economists, but perhaps not so much to many non-economists. A balanced budget increase in taxes and spending will tend to increase job creation. The spending will directly increase jobs, with consequent multiplier effects on other jobs as this income is respent. The increase in taxes will have some negative effects on jobs by reducing disposable income. However, these negative effects will be less as some of this disposable income would have otherwise been saved.

Because the increase in public spending is paid for fully by increased taxes, the public debt will not increase. Furthermore, because the increased jobs will increase GDP, the ratio of public debt to GDP will decrease, which should decrease the real burden of the public debt.

What could be added to Shiller’s piece is that the increased GDP will tend to reduce future deficits. Increased GDP and jobs will reduce unemployment compensation payments and welfare payments, while increasing tax revenue. Research suggests that for each $1 increase in GDP in the short-run, the budget deficit will decline by 38 cents.  Therefore, an initially planned balanced increase in both taxes and spending will in a year or so actually reduce the budget deficit.

Shiller sensibly argues that we should focus this tax-financed increased public spending on the most useful government projects. This means that such increased public spending will have a dual benefit. In the short-run, the projects will provide much-needed jobs. In the long-run, the public services will increase economic growth and/or the quality of life.

Among the most useful possible government spending projects are early childhood programs. As I pointed out in a previous post, a balanced budget increase in public spending on preschool would cost about $175,000 per job created in the short-run.  Although this is a relatively high cost per job created, because we are paying for it with taxes, which has some negative effect, in the long-run this spending creates economic and other benefits far greater than its tax costs.  That is, the present value of the social and economic benefits from increased preschool spending far exceeds $175,000. The present value of earnings benefits alone will be 3 or 4 times these costs. The job creation benefits are bonus benefits.

Our political system is currently focused on the budget deficit. Although the budget deficit is a problem, it is mostly a long-run problem. The more acute short-run problem is the jobs deficit. We need to aggressively address the jobs deficit with programs that will also improve the long-run budget deficit problem, while growing the economy. Early childhood programs could be part of a needed policy package to address all these goals.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
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