Policies for Increasing Economic Growth and Employment in 2010 and 2011

January 14, 2010

The number of jobs in the United States has declined almost every month since December 2007. Although nearly all professional forecasters believe that the economy has begun to recover from the recent recession, many also predict that the pace of the recovery will be slow and that unemployment will remain high for several years. Concerns that the economic recovery will be protracted have prompted the consideration of further fiscal policy actions beyond those actions taken over the last year. In response to a request from the Chairman of the Senate Budget Committee, CBO released a report today that examines the potential role and efficacy of fiscal policy options for increasing economic growth and employment, particularly over the next two years.

CBO concludes that further policy action, if properly designed, would promote economic growth and increase employment in 2010 and 2011. Different policies vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects. Moreover, despite the potential economic benefits in the short run, such actions would add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been.

In a previous report and testimony, CBO identified three key criteria for judging policy options for spurring economic growth and increasing employment:

  • Timingproviding help when it is needed most;
  • Cost-effectivenessproviding the most growth and employment per dollar cost to the federal budget; and
  • Consistency with long-term fiscal objectivespreventing the short-term deficit increase due to stimulative policy from adding excessively to federal debt in the long run.

Other considerations affecting the design of policy options include uncertainty about a policys effectiveness, the distribution of benefits among different people, and the value of additional goods and services that would be produced.

CBO examined the effects on output and on employment of a number of policies. The effect of a policy on employment is measured by the cumulative effect on years of full-time-equivalent employment for each dollar of total budgetary cost (a year of full-time-equivalent employment is 40 hours of employment per week for one year). By focusing on full-time equivalents, the calculations include increases in hours among people in part-time employment and possibly some overtime for full-time employees.

To account for uncertainty, the analysis includes both a low estimate and a high estimate for the effect of each policy. For the range of policy options considered, the figure below shows the range of low to high estimates of the cumulative effects on employment in 2010 and 2011, when CBO expects that the economy will still be in the early stages of the recovery.

Cumulative Effects of Policy Options on Employment in 2010 and 2011,
Range of Low to High Estimates

This paper was prepared by Susan Yang of CBOs Macroeconomic Analysis Division. Mark Lasky and Ben Page contributed significantly to the analysis and calculated the economic effects of the policies.