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Posted by: Michael Mandel on November 22
Now it begins. This morning President-elect Obama took the first step towards asserting himself economically. He laid out not a detailed plan but a goal: To save or create 2.5 million jobs in the next two years. The jobs would come from spending on infrastructure, modernizing schools, and implementing green technologies.
I think this is a good move, but we are in unknown territory. Obviously there is going to be a lot more information coming, over the next few weeks. But here’s some things we know now.
—Suppose that it costs $100,000 to create a decent-paying jobs. Then 2.5 million jobs could cost anywhere between $250 billion and $500 billion, depending on how much leaks overseas in the form of imports. For example, if we start building new bridges, how much of the steel will come from the United States and how much from overseas? If government spending goes out the door for imports, it will create fewer jobs in the U.S.
—For that reason, Obama and the Democrats will be tempted to tie a “Buy American” policy on the spending. That will actually be a critical decision which will help determine which way the global economy goes. On the one hand, “Buy American” will give us more jobs. At the same time it will raise costs, and reduce the amount of actual investment that goes done.
On the other, letting more of the money leak out the door will cost jumps and be politically problematic. But it will also help stimulate overseas economies, which is pretty important as well. In addition, trade restrictions start smacking of Smooot-Hawley tariffs, and no one wants to go down the road again. I’d vote for no restrictions—but it will be close.
—We are now in a world where expectations are essential. Obama has to make it clear that he is committed to spending the money and creating the jobs, no matter what, in order to reassure consumers, businesses and investors.
—-There is no conclusive history about whether a government stimulus program of this magnitude creates a sustainable recovery. The Great Depression was inconclusive, and there has not been any good recent theoretical or empirical work on massive fiscal stimulus. But we’ll find out.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.