Q: When is a jobs program not a jobs program?
A: When it is a tax increase.
Congress, desperately anxious to appear to be doing something about today's high unemployment, is pressing ahead in the lame duck session with what many label a "jobs program." President Reagan has backed it.
But the plan to add 5 cents a gallon to the gasoline tax and spend the proceeds on repairing roads and bridges is far from a jobs program, even according to Reagan's own chief economist. Indeed, it "may actually increase unemployment during the first year or two," Council of Economic Advisers Chairman Martin Feldstein wrote in a memo to the president last month.
Although the extra public spending on roads and bridges envisaged under the plan will provide jobs for some, the gasoline tax increase that pays for the program will take work away from others.
Feldstein explained that the new jobs for construction and maintenance workers created by the program probably will not be enough to offset the job losses "in those industries that produce the goods and services consumers would otherwise buy with the extra $5 billion that they would pay on gasoline taxes."
Consider what will happen if the gas tax goes into effect next April as now seems likely. Motorists will have to pay more--albeit only a dollar or so a week to buy the same amount of gasoline. Some may decide to cut back a little on driving. Others simply may spend less on other things. Someone getting $4.50 change out of a $20 bill after filling the tank, rather than $5 as before, may then spend 50 cents less on lunch that day, for example, or decide against buying a candy bar or--over a period of time--go to the movies less often.
In other words, the $5.5 billion or so of extra government revenue from gas taxes means $5.5 billion less spending power in the hands of consumers. Small individual cutbacks in spending will add up across the economy, reducing jobs here and there in a variety of industries. Moreover, because "consumers spend a substantial part of their money on various kinds of personal services that are much more labor intensive than road building," the jobs lost from the reduction in consumer spending after the tax increase will likely outnumber those gained initially by road builders and bridge repairers, Feldstein told the president.
How has Congress gotten so muddled?
The coexistence of large budget deficits -- which experts keep saying are bad for the economy -- and the worst recession since World War II has confused many people. Traditional antirecession medicine aims to boost the total amount of spending in the economy, whether by raising federal spending on jobs programs or encouraging consumer spending through tax cuts. But this extra spending is financed by government borrowing. It raises the budget deficit, which members of Congress already fear is too large.
Unfortunately, they are attempting to have it both ways, fighting unemployment through a highways spending program while holding the deficit down through a gas tax increase, and it will not work. It will shift around the available jobs in the economy, but not increase the number. If politicians want to use fiscal policy to create more employment, then they have to accept that this means larger budget deficits, at least for the time being.
Many have been frightened away from such a course by the critics of big deficits and the projections of ever-widening budget gaps in the future. Feldstein, for example, has argued recently to a number of different audiences that large deficits are harming the economy. They raise interest rates and thus hurt business investment and other interest-sensitive sectors of the economy, he says. High interest rates, in turn, have driven up the value of the dollar on foreign exchanges and made it harder for American exporters to sell their goods overseas and harder for domestic manufacturers to compete with cheap imports, he argues.
However, even Feldstein acknowledged to a group of reporters recently that budget deficits do not, in fact, depress the economy overall, even if they may raise interest rates. The depressing effect of higher interest rates in some sectors of the economy is more than offset by the higher spending -- whether public or private -- that budget deficits support, most economists agree.
Budget deficits worry economists for two main reasons. One is that they encourage consumption at the expense of investment. The other is that they may worsen inflation and inflationary expectations.
Both of these arguments make sense if the economy is strong, unemployment low and business operating at close to full capacity. The large deficits now projected for the latter years of the decade, when the economy is expected to have recovered from recession, are thus a major problem. But in today's depressed economy -- when business does not want to invest because it cannot use all its existing plant and equipment, inflation is declining and unemployment is widely perceived as the nation's major problem -- the deficit is helping and not hurting the economy.