Obama's job summit challenge: creating jobs on a budget

President Obama is slogging through difficult terrain by holding a so-called "jobs summit" this week. More than 15 million Americans are looking for work, a record number in more than six decades of Labor Department tracking. But government efforts to create jobs will cost money at a time when federal budget is soaring into its own record territory.

Mr. Obama can't avoid either of these issues – the unemployment or the deficits.

Officially, the jobs forum is a chance for him to seek ideas and consensus from business leaders about what can boost hiring. But in the build-up to the meeting, it's become clear that the White House is also trying to figure out how to balance these challenges – how to create jobs on a budget.

Most forecasters expect the economy to start adding jobs next year, but not at a strong enough pace to bring the unemployment rate down sharply from the current 10.2 percent. With that as a backdrop, Obama may support tax credits or other programs to designed to spur hiring. But he’ll also be watching the price tag, in part because polls show Americans to be worried about what rising federal deficits will mean for future prosperity and for their own pocketbooks.

The attendee list for Thursday's jobs forum includes the CEOs of Google, Comcast, Boeing, Disney, and FedEx, as well as labor leaders and prominent economists.

Some of the participants in the forum will urge Obama and Congress not to worry so much about deficits. Rather, they will argue, the government should spend to create jobs either indirectly through tax incentives that affect private employers, or directly by government spending on roads, green energy, or community service programs.

Their reasoning: Unemployment has become much worse than the White House envisioned when it made the case early this year for a $787 stimulus program. The federal debt is a significant long-run problem, fueled more by healthcare programs than by temporary stimulus efforts. The Treasury's fiscal troubles could actually be made worse, they add, if policymakers fail to get the economy moving.

It's an argument right out of economics textbooks. When the economy is mired in a downturn, the last thing you want to do is focus on reducing budget deficits.

"That’s exactly what happened in 1937," says Scott Lilly, a finance expert at the Center for American Progress, a left-leaning think tank in Washington.

"We went right back into a second depression. That certainly didn’t do anything to restore fiscal balance."

Obama is also hearing a different view on deficits, though. As he toured China recently, he heard from leaders there who want assurance that America will be able to repay the loans China is making, in effect, with its purchases of US Treasury debt.

Some economic research suggests that government efforts to stimulate the economy will be less effective when the government is deeply and chronically in debt.

A research paper published last month, for example, finds that stimulus spending – such as to create jobs – has often done more harm than good in emerging-market nations where public debt equals 50 percent or more of the gross domestic product (GDP). The risk is that the nation will be spending money that it can't really afford to borrow – and that the prospect of higher taxes or a debt crisis will keep businesses from creating jobs.

Although the US is an economically advanced nation, the lesson could still apply, says Enrique Mendoza of the University of Maryland, one of the report's authors. During the recession, tax revenues have plunged even as government spending on stimulus has soared. These trends, coupled with war spending and fast-rising costs for Medicare and Medicaid, could push US public debt to rise from about 40 percent of GDP in 2008 to more than twice that amount during this decade.

This finding, included in a broader study about fiscal stimulus by Mr. Mendoza and co-authors Ethan Ilzetzki of the London School of Economics and Carlos Végh of the University of Maryland, helps explain Obama's bind. It may be prudent to try to bolster a weak job market now, but the public debt may no longer be an off-in-the-future type of problem.

See also:

Boomerang kids: recession sends more young adults back home

Does US need a second stimulus to create jobs?

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