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I like Stan Collender’s take on Bush’s fiscal legacy in his most recent Roll Call column.  (And here’s the post on Stan’s Capital Gains and Games blog.)  I think Stan feels pretty much the same way as I do about it, but he better identifies the range of feelings one might subjectively attach to the disappointing facts of our federal-budget reality, as anywhere from “missed opportunity” to “colossal failure.”

I agree with Stan that the “missed opportunity” of the Bush Administration was a huge one:

At best, Bush’s budget legacy has to be characterized as a huge missed opportunity. No other president has ever been presented with the extraordinary chance that Bush had to change the country’s fiscal outlook so positively and more or less permanently. But Bush didn’t just fail to take advantage of that obvious invitation to make budgetary and presidential history — he missed it completely.

And I agree with Stan that in squandering that tremendous opportunity, President Bush has left President Obama with very little “wiggle room” and many fewer opportunties, when it comes to easy policy options to strengthen the economy:

The government borrowing not eliminated by Bush has set the stage for what will now be a series of far more difficult budget decisions than otherwise would have occurred for years, or decades, to come. For example, the extraordinary borrowing the government is doing now for the Troubled Assets Relief Program, AIG and a stimulus program wouldn’t be as much of a concern if Bush had paid down the debt as promised.

The easy options are no longer, but the opportunities still exist; as Stan indicates, they’re just much tougher choices that now have to be made by our new president.  Good thing President Obama comes into the White House with so much support from the American people, and with so much wisdom within himself and his advisors that it might indeed be possible to finally make these necessarily tough choices for the country.  This week’s Economist magazine sees this contrast between the Bush Administration’s squandering of opportunities, and the possibility that the Obama Administration will seize their (now more limited and therefore precious) opportunities–because we really cannot afford to waste them:

…it is the domestic economy which will consume most of Mr Obama’s time. And here American renewal must take two opposite forms. In some ways, the times cry out for more active government: for stronger regulation of banks and near-banks, for much more short-term government spending to counteract the contraction elsewhere in the economy, and for the establishment of a basic health-care system for everyone. But Mr Obama also needs a plan to shrink other aspects of government over the longer term. Without reform of expensive entitlements, the federal government faces bankruptcy. Cutting entitlements at the same time as buying hundreds of billions of dollars-worth of bad loans from Wall Street is difficult politics, to say the least. But at least Mr Obama has acknowledged that he will have to do it. A more equitable health system coupled with a path towards budget reform would, on their own, make Mr Obama’s presidency a remarkable one. And at least he has the votes in Congress to make it happen…

Mr Bush (see article) had a simplistic tendency to see the world through ideological and partisan spectacles. He hung on to bad advisers for longer than he should have; he divided the world too often into good and evil; and he plotted to establish a Republican hegemony although he had sold himself to the electorate as bipartisan. In economic matters, he was too prone to sacrifice the long-term good for short-term gain. He seemed curiously incurious about vital details, such as the conduct of the war in Iraq.

Mr Obama seems to be different. By offering the most prized cabinet job to his rival, Hillary Clinton, and by keeping on Robert Gates, the defence secretary, who has done a good job, Mr Obama has shown a determination not to surround himself with cronies. He has put together a team which has impressed almost everyone with its calibre and its centrism. He has been tough already, dispatching blunderers and being prepared to admit to mistakes. He has repeatedly warned Americans that he will have to do unpleasant things.

The next four, or eight, years may be a disappointment, a triumphant renewal or something in between. Mr Obama is inexperienced, and right now the world looks especially forbidding. But he is a respectful and thoughtful man, and that is a good start.

It’s not whether it’s going to be a bigger government or a smaller government; it’s got to be a better government going forward.  My favorite parts of the inauguration speech, on how government can do better when it comes to our economy:

Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age…

Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America — they will be met…

We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America…

The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. All this we will do.

Now, there are some who question the scale of our ambitions — who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.

What the cynics fail to understand is that the ground has shifted beneath them— that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. And those of us who manage the public’s dollars will be held to account — to spend wisely, reform bad habits, and do our business in the light of day — because only then can we restore the vital trust between a people and their government.

Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control — and that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our Gross Domestic Product, but on the reach of our prosperity; on the ability to extend opportunity to every willing heart — not out of charity, but because it is the surest route to our common good… 

–President Barack Obama, January 20, 2009

In his recent interview with CNN’s John King, President-elect Obama has the right idea about what needs to be done as quickly as possible (in as “short a run” as possible) for the American worker and in particular manufacturing workers who cannot count anymore on jobs making traditional fossil-fuel-powered automobiles.

But Obama also understands that the U.S. economy has a short-term problem that’s different from our long-term challenges, and that his Administration will need to follow two big, bold, yet seemingly opposite policy strategies as the economy moves from immediate countercyclical “life support” to an emergence on the other side of this recession that has to set us on a more sustainable path for the longer run.  From the CNN transcript of the same January 16th interview (emphasis added):

[John] KING: You mentioned solutions, the stimulus plan, the recovery plan, as you call it, the bailout plan, the TARP program, as they call it in Washington, you get will that money.

Hard to find anybody who disputes the urgency, but you find a lot of people worried about the price tag.

OBAMA: Yes, and they should be.

KING: One of your key allies in Congress said just yesterday, $850 billion in stimulus may be a first step. They might need more.

You know what the bankers are saying on Wall Street, that the financial institutions are still losing money, many of them been holding onto that federal money even, and they say, it might not be enough $700 billion might not be enough.

OBAMA: Right. Right.

KING: Are you going to have to, in your early days, draw a line, say, we can’t keep printing money; this is it.

OBAMA: Here’s what we’re going to have to do.

We’ve got distinguish between short term and long term. Short term, the most important thing is to put people back to work, all those folks that you had breakfast with. If they’re working, that means they’re paying taxes. That means that they’re buying goods and services. And the economy, instead of being on a downward spiral, starts back up on an upward spiral.

But what we also have to recognize is, is that the deficit levels that I’m inheriting, over $1 trillion coming out of last year, that that is unsustainable. At a certain point, other countries stop buying our debt. At a certain point, we’d end up having to raise interest rates and it would end up creating more economic chaos and potentially inflation.

So, what we want to do is to say that instead of just printing more money, let’s look at medium term and long term. Let’s get a handle on Social Security. Let’s get a handle on Medicare. Let’s eliminate waste in government where it exists. Let’s reform our Pentagon procurement practices.

All those things are going to have to be done in concert. And that’s going to be tough. It’s going to be tough, because the only way to do it is if Democrats and Republicans both are willing to give up a little bit of what they consider to be their favorite programs. And we’re going to have to look at all this stuff in a fairly short period of time, because we’re not going to have five or 10 or 15 years to kick the can down the road. We’ve got to get started right now.

This cartoon by Jack Ohman of the Oregonian, referencing the latest CBO deficit projection of $1.2 trillion for fiscal year 2009, and hinting at the frantic efforts to throw more government money out there as “stimulus,” appeared in today’s Washington Post.  Obviously, I like it.  I went to the Capitol Steps show last night, too, and they were hilarious–and now I’m thinking this “Blowin’ in the Wind” idea would be a good parody for them to add to their repertoire.  (I bet they could do a mean Peter, Paul, and Mary, or Bob Dylan, too.)

President Bush’s final Economic Report of the President came out yesterday.  It’s produced by the President’s Council of Economic Advisers, pictured above.  I thought to myself, “yeah, they obviously have reason to look so gloomy,” but it turns out that photo is from the signing of last year’s report–suggesting they already knew a year ago that the 2008 economy, and writing the last Bush economic report, wouldn’t be so fun.  As I read it, I find it quite a contrast to the final Clinton Administration Economic Report.  It should have been a “legacy” report, but even the crown jewel of Bush economic policy, the Bush tax cuts, get a mainly pedantic discussion in chapter 5 of the report.  There’s no quantitative evidence of the positive economic results from the tax cuts other than the magnitude of the cuts and the relief provided; the discussion mostly sounds forward-looking and “in theory” (rather than “in practice”) and makes you wonder why readers should believe that permanently extending these tax cuts is such a great idea.

I know I pointed out just yesterday how incoming presidents have a tendency to overpromise and sound so darn caring and sympathetic to all the diverse viewpoints surrounding them, but today’s headline in the Washington Post still makes me happy:  “Obama Pledges Entitlement Reform.”  From the story, which came out of a 70-minute interview with the Post’s editorial board and writers:

President-elect Barack Obama pledged yesterday to shape a new Social Security and Medicare “bargain” with the American people, saying that the nation’s long-term economic recovery cannot be attained unless the government finally gets control over its most costly entitlement programs.

That discussion will begin next month, Obama said, when he convenes a “fiscal responsibility summit” before delivering his first budget to Congress. He said his administration will begin confronting the issues of entitlement reform and long-term budget deficits soon after it jump-starts job growth and the stock market.

“What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further,” he said. “We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else’s.”…

Obama repeated his assurance that there is “near-unanimity” among economists that government spending will help restore jobs in the short term, adding that some estimates of necessary stimulus now reach $1.3 trillion.

The president-elect said he believes that direct government spending provides the most “bang for the buck” and that his advisers have worked to design tax cuts that would be most likely to spur consumer and business spending.

But he framed the economic recovery efforts more broadly, saying it is impossible to separate the country’s financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.

“This, by the way, is where there are going to be very difficult choices and issues of sacrifice and responsibility and duty,” he said. “You have to have a president who is willing to spend some political capital on this. And I intend to spend some.”…

The president-elect has been in frequent conversation with lawmakers, including House Majority Leader Steny H. Hoyer (D-Md.) and the Blue Dog Coalition of fiscally conservative Democrats, who repeatedly told Obama they would be willing to support his stimulus package only if he pledged not to lose sight of the larger budget picture. Those who will be invited to attend the summit include the Blue Dogs, Senate Budget Chairman Kent Conrad (N.D.), ranking minority member Judd Gregg (N.H.) and a host of outside groups with expertise on the topics, the president-elect said…

“I know some people have said, ‘You have this big economic crisis on your hands, and so President Obama is going to just put off issues like this until his second term or later in his first term,’ ” he said. “I don’t think we have that luxury.”

He added: “That doesn’t mean that we close a deal or we have some big grand, you know, Camp David-type event early in my administration. It does mean that we have a team in place which is hitting the ground and starting to engage constructively.”… 

You see, even with the massive amounts of deficit-financed government spending everyone knows we’ll have to do over the next year or two, policymakers need to acknowledge that “strengthening the economy” over the next four years requires a sequence of two very different economic policy strategies.  In the short term, we need to stimulate consumption–whether it be personal consumption (which is very hard to do or expect right now) or government consumption–in order to fill up the economic-activity hole and use up/employ some of our economy’s currently idle capacity.  In the longer run, we need to stimulate saving–the opposite of consumption–in order to fill up the (physical and human) capital hole and increase the capacity of the economy.  The tricky part is the segue (and that term implies gracefully) between these two opposite strategies, and recognizing that such a smooth transition (what my boss, Bob Bixby, has referred to as an “exit strategy”) is where we ultimately need to go as we take up the first of the two strategies (the stimulus part).  

And I read more encouraging words in today’s Post.  In another front-page story about the stimulus (now more affectionately known as “recovery”) package, Obama seems to understand that even deficit spending can be done in a fiscally responsible way (emphasis added): 

Top Obama officials say both initiatives are critical to turning the economy around: The spending package seeks to stimulate spending by showering cash on consumers, local governments and businesses. The bailout program, meanwhile, attempts to forestall trouble in the financial system, where risky lending practices helped spark the recession in the first place…

“We can’t just spend our way out of the problem. At some point credit has to flow effectively,” he said. He added that “banks now are fully caught up in a downward spiral where they have now affected the real economy, the real economy is now affecting their balance sheets. And so we’re going to have to intelligently and strategically infuse some additional capital into the financial system.”

So “fiscal responsibility” in the current climate of massive deficits to me means: (i) understanding that tricky transition between the two seemingly-opposite policy strategies for the short run and the longer term, and (ii) keeping the deficit spending in the first stage as sensible and valuable as possible.  So I’d like to see Obama’s “fiscal responsibility summit” focus not just on possible reforms to the entitlement programs for the longer term, but also on “fiscally-responsible deficit spending” in what’s being planned for the first couple years.  That means short-term stimulus spending that despite the deficit-financed cost, has to be done in a way that’s cognizant of the costs, the constraints, and the tradeoffs; attentive to the time horizons over which commitments to those costs and promises of the benefits can be counted on; and given those factors, intent on maximizing (as much as possible) benefits relative to costs over the longer term and not just immediately.  Short-term deficit spending and big deficits are justified, as long as they leave us in a better place (than we otherwise would have been) when we emerge on the other side of this recession.

I’ll try to elaborate on this idea of “fiscally-responsible deficit spending” in the weeks and months to come, and I hope it’s a topic that Obama’s “fiscal responsibility summit” will try to address.

I’ve been looking back to the Bush Administration’s first budget (for fiscal year 2002) and sighing (heavily).  In the “Blueprint for New Beginnings” budget document issued February 2001, this was what the new president had to say about those “new beginnings”:

For too long, politics in Washington has been divided between those who wanted big Government without regard to cost and those who wanted small Government without regard to need. Too often the result has been too few needs met at too high a cost. This budget offers a new approach—a different approach for an era that expects a Federal Government that is both active to promote opportunity and limited to preserve freedom.

Our new approach is compassionate…

This new approach is also responsible:

It will retire nearly $1 trillion in debt over the next four years. This will be the largest debt reduction ever achieved by any nation at any time. It achieves the maximum amount of debt reduction possible without payment of wasteful premiums. It will reduce the indebtedness of the United States, relative to our national income, to the lowest level since early in the 20th Century and to the lowest level of any of the largest industrial economies… 

–George W. Bush, February 28, 2001

And what has actually happened over the past eight years?  Here are some of my calculations on the “Bush fiscal legacy” (based on the most recent CBO and Treasury data):

• Outlook for the federal budget in January 2001 for fiscal years 2002 through 2011:  a ten-year surplus of $5.6 trillion.
• Latest (January 2009) realized and projected deficits over the same period (FY2002-11):  a ten-year deficit of $4.5 trillion (or $4.9 trillion under a policy-extended scenario)–a deterioration of more than $10 trillion.
• Federal debt held by the public has increased from $3.388 trillion in January 2001, to $4.428 trillion in January 2005 (end of Bush’s first term), to $6.289 trillion in January 2009 (as of 1/13)–an increase of $2.901 trillion.
• Gross federal debt (including that owed to the federal trust funds) has increased from $5.716 trillion in January 2001, to $7.628 trillion in January 2005, to $10.555 trillion in January 2009 (as of 1/13)–an increase of $4.839 trillion.

In other words, instead of retiring nearly a trillion in debt over the first term back when we legitimately had the economic opportunity to do so, the fiscal legacy of the Bush Administration will be that they have left us with a debt that has nearly doubled over two terms, now that economic circumstances leave us with no present option but to keep adding to it.

Sigh…

The news on retail sales is much worse than anticipated:

NEW YORK (CNNMoney.com) — Retail sales fell for the sixth straight month in December, the longest consecutive stretch of monthly declines in the measure in at least four decades.

“Consumers aren’t spending and that’s not good for the economy,” said Scott Hoyt, senior director of consumer economics with Moody’s Economy.com…

Retail sales reflect the state of consumer spending which in turn fuels two-thirds of the nation’s economy.

To that end, the Commerce Department said Wednesday that retail sales tumbled 2.7% last month, compared with a revised 2.1% drop in November. November sales were originally reported to have fallen 1.8%.

Economists surveyed by Briefing.com [link to economic calendar page] on average had forecast a decrease of 1.2% for December.

Sales excluding autos and auto parts also fell a much worse-than-expected 3.1% in December, compared to a revised 2.5% decline in November. Sales minus auto purchases were originally reported to have declined 1.6% in November.

Economists had forecasted a decrease of 1.3% in the measure, according to Briefing.com

“We’ve never had this long stretch of declines,” said Michael Niemira, chief economist with the International Council of Shopping Centers (ICSC), who has analyzed the government’s monthly retail sales numbers going as far back as 1967.

“This current situation is a reflection of a tough, tough environment,” he said. “Consumers are buying only essential items. Credit restraints have really impacted sales of big ticket purchases.”

“Moving forward, the question is whether this is the low point and could we get some moderation in retail sales in 2009,” Niemira said. “We haven’t seen a lot of convincing data to that effect.”

Yes, the decline in consumer spending isn’t good for the strength of the economy, but folks aren’t going to start consuming again until they’re back on secure economic footing–meaning fundamentally, they need (good and lasting) jobs.  Putting more money in the hands of households through tax cuts will provide some needed assistance to American families, for sure.  But it won’t encourage them to buy things they cannot afford (beyond their perception of the boost to their discretionary income provided by the temporary tax cut), nor should it.

Now is not the time to try in vain to get the private sector to consume.  It’s only the public sector who is in the mood to spend right now, and it’s only the public sector who can afford it.  If government spending is able to “fill in for” private-sector consumption, that will be one of the best ways to marry the goals of short-term economic stimulus and longer-term economic growth.  In fact, economists who are not so worried about the longer-term implications of the large amount of public-sector dissaving (deficit spending) that is now occurring, are not so worried because they’re actually counting on the private sector to step back from its consumption binge.  Goldman Sachs, for example, has said they are not troubled by the implications of the surge in government borrowing in terms of America’s reliance on foreign capital, precisely because they “are optimistic that the markets will absorb this surge in government borrowing because it is matched by an even greater drop in private borrowing” such that “private sector saving will finance more than 100% of the incremental public sector dissaving” (from Goldman’s December 31, 2008 U.S. Economic Analyst newsletter).

In other words, we’ve got to count on government to do the “work” of consuming right now, while we ordinary Americans hang tight, just hold onto or find our jobs, and only buy stuff we feel we can comfortably and sensibly afford.

There’s news from the Treasury Department today (monthly Treasury statement) on the federal budget deficit for the first quarter of fiscal year 2009 (i.e., 4th quarter of calendar year 2008).  I guess this is what a year headed for a (way?-)more-than-a-trillion-dollars deficit looks like; AP reports:

The federal government already has run up a record deficit of $485.2 billion in just the first three months of the current budget year, the Treasury Department said Tuesday.

The deficit is on track to surpass $1 trillion for all of fiscal 2009 and some economists believe it could go much higher.

The deficit for December totaled $83.6 billion, a sharp deterioration from a year ago when the government managed a surplus of $48.3 billion…

All the red ink is occurring because of the massive spending on the $700 billion financial rescue program and a prolonged recession which has depressed tax revenues.

The imbalance from October through December is the highest on record for a first quarter and surpasses the mark for a full budget year of $454.8 billion set last year.

The Congressional Budget Office last week projected that the deficit for this fiscal year will hit $1.2 trillion…not includ[ing] any of the costs from the economic stimulus program that President-elect Barack Obama is hoping Congress will pass in the next few weeks…

The red ink through December includes $247 billion that has been spent on the $700 billion financial rescue program [TARP]…

Yet, as this CNN-Money story points out, despite the ballooning federal debt, interest payments are actually down from a year ago because interest rates are now so low:

According to the report, Treasury also paid nearly $43.5 billion in interest on its outstanding debt in the first quarter of the fiscal year, down from nearly $58 billion paid during the same period a year ago, reflecting the dramatic drop in interest rates on Treasury bonds.

Treasury has been issuing bonds at a record pace in the past few months to pay for its massive bailout programs. Although the Treasury adds to the deficit whenever it issues bonds, that issuance has come cheap recently as interest rates have plummeted to record lows.

Can/will those interest rates stay low as the debt continues to rise at a pace just around $1 trillion per year?  No.  Just look at the CBO report, which shows (Table 2, pg. 12) that although short-term interest rates are forecast to remain in the zero-to-one percent range for 2009 and 2010, they are expected to rise to the 4-to-5 percent range by the latter half of the ten-year budget window.  Even under the current-law baseline with no extension of any of the tax cuts, annual net interest payments double in just five years–from $195 billion (1.4 percent of GDP) in fiscal year 2009, to $392 billion (2.2 percent of GDP) in fiscal year 2014.  (And under Concord’s more realistic, policy-extended baseline, net interest in fiscal year 2014 reaches $479 billion–i.e., in nominal dollar terms, coincidentally exceeding the magnitude of last fiscal year’s (”previous record”) deficit.)

Yesterday’s front page story in the Washington Post mentions the skepticism many policymakers and economists–even those from the President-elect’s own party–have about the effectiveness of some of the pieces of the Obama “recovery and reinvestment” plan (they no longer want to call it just “stimulus”):

Obama’s speech came as members of Congress, particularly Democrats, had begun attacking some aspects of the still-unfinished proposal. Sen. John F. Kerry (Mass.) and other Democrats object to a proposed $3,000 tax credit to corporations for each job they create or save, saying the credit would be ripe for abuse and difficult to administer.

John Irons (of the Economic Policy Institute) and I expressed similar doubts about that “new-jobs” business tax credit in an interview with Minnesota Public Radio last week (listen here), and Len Burman and Howard Gleckman have been testifying against it on the Tax Policy Center’s TaxVox blog. 

And even the Obama economic team admits in their analysis of their own recovery plan (and here’s a video explanation by CEA Chair Christina Romer) that tax cuts are generally less effective as quick-acting stimulus than direct government spending is–even as they make an assumption in the analysis that overstates the economic bang per buck of the tax cuts (emphasis added):

These estimates show that all components of the program make important contributions to job creation. The direct spending programs have the largest job bang for the buck. State fiscal relief also has important direct and indirect effects on jobs, and so very strong job bang for the buck. Tax cuts, though they have no direct jobs effect and generally affect consumer and firm spending only gradually, also have important job creation benefits by the end of the two-year window.

It is important to note that the jobs effects of temporary broad-based tax cuts would probably be considerably smaller. Large proportions of temporary tax cuts are saved, blunting their stimulatory impact on output and employment. The prototypical recovery package only provides for the first two years of the Making Work Pay tax cut. Our analysis assumes that households treat the tax cut as permanent in determining their short-run spending.

But I really think Bruce Bartlett may have a legitimate new worry about why the “new jobs” tax credit, and all the talk of it being in the works, may turn out to be even counterproductive.  In a column for Forbes, Bruce writes (emphasis added):

Unfortunately, Obama also plans another tax scheme with a very dubious record: a $3,000 tax credit for businesses for each new job created.

A similar program was enacted in 1978, but a report from the Department of Labor’s Inspector General during the Clinton Administration urged Congress to discontinue it because 92% of those hired under the program would have been hired anyway. An academic study found that 70% of the credits were payments for workers that would have been hired without them. Despite many efforts to reform the credit, it was eventually abolished in 2006.

In reality, it’s very difficult to determine what a “new” job is. And it’s hard to prevent businesses from gaming the system–laying off workers, rehiring them later and claiming a credit for job creation. Of course, the government will try as hard as it can to prevent this from happening, but in practice it is almost impossible to do. The primary beneficiaries will necessarily be firms that happen to be hiring for unrelated reasons.

In the near term, it’s possible that the prospect of a tax credit for employment will encourage businesses to lay off workers now and postpone hiring. No business wants to hire a worker and find out that if it had just waited a little bit longer to do so it would have saved $3,000 in taxes.

…and Bruce points out that this inverse “anticipation” effect of the policy may (unfortunately) occur with other parts of the Obama recovery plan as well:

Finally, the impact of increased public works spending on state and local governments cannot be ignored. Most federal transportation spending goes for projects initiated by them. When they think there is a chance that the federal government will increase its funding, they tend to cut back on their own spending in hopes that the feds will foot the bill. A study by economist Edward Gramlich found that the $2 billion appropriated by the Local Public Works Act of 1976 postponed $22 billion in total spending as state and local governments competed for federal funds and actually reduced GDP by $30 billion ($225 billion today).

There are reports that California and other states are halting highway, school and bridge construction already underway. While it may be that they are simply reacting to a shortfall in tax revenue, it would be naive to think that the prospect of stimulus spending from Washington isn’t a factor as well. As The New York Times recently reported, states “are clearly holding out hope that President-elect Barack Obama will pump some federal money into the stalled infrastructure projects, and some may even be delaying work until they have a chance to make the case for federal spending.”

Another somewhat-tangential worry I have about the recovery plan is what kind of jobs the recovery plan will create and who will get them.  The Obama team wants to fill up a good part of the job loss hole that has already dug us 2.6 million jobs deep in 2008.  Table 4 in their analysis shows they expect their recovery plan to create or save 3.675 million jobs over the next two years.  While that would more than cover the total jobs we’ve already lost in 2008, the distribution by industry of jobs created does not line up with the distribution by industry of jobs lost.  The report shows 408,000 jobs to be created in the manufacturing sector, but 791,000 manufacturing jobs were already lost in 2008.  It also shows 244,000 new jobs for the government sector, but 181,000 jobs were gained in the government sector in 2008.  So the jobs created won’t exactly be a perfect replacement for the jobs lost (nor should they be if we want to do what makes sense from an economic efficiency and macroeconomic growth perspective), which suggests that for all this job creation to work smoothly, a good deal of attention will need to be on how to best match up the workers who have lost their jobs to the new jobs that are created.  I wonder how much the Obama economic team has thought about that and how doing that right (such as providing for job retraining) may add to the cost of their plan.