Congress' next trick: Pull jobs out of a hat

Lawmakers are on the hot seat to spur job growth. There's no consensus yet on the best strategy, in part because all the options have downsides.

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By Jeanne Sahadi, CNNMoney.com senior writer

Map
Where does your state rank?
Americans everywhere are feeling the recession's pain some more than others.

NEW YORK (CNNMoney.com) -- The economy is not out of the woods, and Congress is feeling pressure to do something about it.

Third-quarter growth was weaker than initially thought. Twenty-nine states reported rising unemployment rates in October. And 1 million people are at risk of losing their unemployment benefits by January.

What can Washington do to help?

Throwing another lifeline - such as extending unemployment benefits and subsidies to help jobless Americans continue paying for health insurance - are likely possibilities.

But the stickiest wicket is how to spur job growth.

The president will hold a jobs summit on Thursday to discuss ideas. House leaders have said they're aiming to vote on a jobs bill by Dec. 18. And Senate Majority Leader Harry Reid, D-Nev., has indicated the Senate would take up a jobs bill after it completes work on health reform.

Several ideas are percolating among economists and lawmakers. But none are clear winners - politically or economically.

There is a limit to what government can do to create jobs, and there is legitimate disagreement about which measures offer the most bang for the buck.

It's also because a jobs bill that adds to the deficit may face headwinds since the country's debt problem - which both Democrats and Republicans played a heavy hand in creating - has become a political hammer to oppose legislation.

In the meantime, the spectrum of views in the debate over whether and how to stimulate job growth is wide.

There are those who say you can't go big enough.

"If you fail to have a program in place sufficient to the task, you end up constantly behind the curve," said James Galbraith, a professor of government at the University of Texas. Galbraith estimates that the country would need to generate 3 million jobs a year for the next five years to get the employment rate back to where it was a few years ago.

Others say the best approach is "do no harm."

The ideas for stimulating job growth so far are "at best neutral and at worst harmful to the economy," said J.D. Foster, a senior fellow at the conservative Heritage Foundation. "The economy needs a dose of confidence and certainty, not random, half-baked ideas."

Foster said it would be better for the administration to make a clear statement that it will not push for any tax increases until the unemployment rate is at or below 7%, something that isn't likely to happen until after the next presidential election. Beyond that, he'd recommend more tax cuts, but recognizes that would be difficult given the country's record-sized deficits.

Whatever Congress decides, no single measure will be a panacea. Here are some of the leading ideas being discussed.

Offer a payroll tax holiday: Temporarily suspending the payroll tax - which is a 12.4% tax on workers' first $106,800 of wages - could accomplish two goals, supporters say.

Employers, who typically pay half of the tax, would have more money to hire people. Workers, who typically pay the other half, would have more money to spend on consumer goods, which in turn can help create jobs.

A payroll tax holiday would be a particular boon for small business owners and the self-employed, since they foot the full 12.4% tax.

Princeton economist Alan Blinder, who will attend Thursday's summit, said a payroll tax holiday "probably will induce some hiring" but not necessarily enough to justify the expense since there's no guarantee the employer will use the extra money to hire more people.

"It's really a less efficient thing to do than the new jobs tax credit," Blinder said.

Create a new jobs hiring credit: The idea behind a hiring credit is to offer employers a sweetener if they bite the bullet and hire more people. The sweetener would come in the form a tax credit for every new hire.

Skeptics of the credit say there are several potential pitfalls:

  • Employers who were already planning to hire would benefit disproportionately from the credit.
  • The amount of the credit, which isn't likely to exceed $3,000 to $5,000 per hire, may not be enough for employers to justify the costs of bringing on a full-time employee.
  • Unless the credit's parameters are carefully structured, it would be easy for employers to game the system by, for instance, firing and then re-hiring the same worker to qualify for the credit.

The latter can be addressed fairly easily by only making the credit available for hires that increase the total number of workers on a company's payroll, Blinder said. So the company with 100 workers would only get the credit for hiring employees that push the total number of workers over 100.

Help close state and local budget shortfalls: With jobless rates rising in many states, revenue has fallen, leaving many states with yawning budget deficits.

Mark Zandi, chief economist of Moody's Economy.com, estimates that state and local governments are likely to face a combined shortfall of $150 billion in fiscal year 2011, which begins next summer.

"The hole is turning out to be larger than we thought and deeper," Zandi said at a conference held by the liberal Economic Policy Institute last week.

And it could cause the loss of up to 900,000 jobs in 2010 alone, according to another liberal think tank, the Center on Budget and Policy Priorities.

That's why Zandi, who was an economic adviser to John McCain during the 2008 presidential election, and Galbraith think the federal government could help curtail job loss by agreeing to send more aid to close state and city budget gaps.

Galbraith thinks the federal government should plug the hole completely. Zandi thinks Washington should send another $75 billion, which would augment the $40 billion the states will have coming to them as a result of the stimulus legislation passed in February. That would shrink to $35 billion the hole that states would then have to address.

Offer public-service employment: Blinder and others have suggested the federal government put money towards creating new public-service jobs.

But the new jobs would have to be not only at the federal level but at the state and local level as well. That's because the economy needs several million jobs and the civilian federal workforce is already at 1.4 million, Blinder said.

He is dubious that number could be doubled, and even if it was, it's still wouldn't make a big enough dent. "So in terms of where the jobs are, it's at the state and local level," Blinder said. To top of page

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