We need a refresher course in Job Creation 101 to judge how much, if at all, President Obama's proposed $447 billion program of spending increases and tax cuts might revive America's sputtering job machine. Recall that the private sector is the main employment engine. Businesses create jobs when two conditions are met. First, extra demand for their products justifies more workers. Second, the extra demand can be satisfied profitably. There are qualifications to these generalizations (start-ups, for instance), but these are the basics.
By contrast, government is less a job creator than a job changer. It supports jobs (soldiers, teachers, scientists) by taxing, borrowing and regulating. If government taxed, borrowed or regulated less, that money would stay with households and businesses, which would spend it on something else and, thereby, create other jobs. Politics determines how much private income we devote to public services.
To this observation, there's one glaring exception. In a slump, government can create jobs by borrowing when the private economy isn't spending. But the effect is temporary and isn't automatic.
Obama's controversial $825 billion "stimulus" program in 2009 conformed to this logic. He claims it created or saved jobs. I think he's right. At the time, consumers and companies -- terrified by the financial crisis -- had gone into lock-down. The new government outlays and tax breaks induced spending that otherwise wouldn't have occurred. How many jobs were saved or generated is harder to say. The Congressional Budget Office estimates a peak total somewhere between 1.4 million and 3.6 million.
By similar logic, the new package might also raise employment. Macroeconomic Advisers, a well-known forecasting firm, estimates the program could add 1.3 million payroll jobs by the end of 2012. However, it also notes the effect would be temporary unless Congress renewed the program.
The original stimulus was only a partial success, because it failed in its main mission: triggering a strong, self-sustaining economic recovery.
Condition One for private-sector job creation isn't met: Demand is insufficient. Governments need to "borrow and spend" to bolster demand, writes Martin Wolf, the Financial Times' economic commentator. Deficit reduction should be long-term.
It's a strong argument -- but hardly airtight. Crucially, it doesn't say why the past year's continuing massive stimulus (huge budget deficits, low interest rates) didn't do more for economic growth. The answer, I think, is psychology. Companies -- like consumers -- have become defensive. They accumulate a cash hoard against unknown threats. Our political leaders have also compounded the caution and fear; indeed, government policies sometimes cause unwanted behavior.
Start with Obama. His health care "reform," by requiring employer-paid insurance, will raise employment costs. Did he really think this wouldn't affect the profitability of hiring? Many Obama policies frustrate job creation.
Switch to Capitol Hill. It's more of the same. Republicans and Democrats exult in vitriolic attacks on each other. Their pleasure from mutual vilification comes at the public cost of lower confidence. By contributing to this, the disarray over long-term deficits also undermines employment.
Our jobs debate should acknowledge these realities. No policy will succeed unless it results in self-sustained hiring by private firms. This means giving job creation precedence over other goals. It means conducting the debate so that the nation's spirits are not further depressed by partisan rancor. It suggests taking proposals from both parties, because neither can be sure its approach will work.
It ought to be about building confidence, not scoring political points. This is a tall order. As the 2012 election approaches, it may be too tall.