President-elect Barack Obama made public Saturday an analysis (PDF) by his economic advisers, Christina Romer and Jared Bernstein. The analysis estimates that a $775 billion plan of tax cuts and new spending would create 3.5 million jobs over the next two years.
In the executive summary Romer & Bernstein state plainly their conclusion that government spending creates more jobs than tax cuts.
Tax cuts, especially temporary ones, and fiscal relief to the states are likely to create fewer jobs than direct increases in government purchases.
But, in Appendix 1, Romer & Bernstein admit that they have no idea what impact tax cuts would have on jobs.
For tax-based investment incentives, we used the rule of thumb that the output effects correspond to one-fourth of the effects of an increase in government spending with the same immediate revenue effects. This implies a fairly small effect from a given short-term revenue cost of the incentives. But, because much of the lost revenue is recovered in the long run, it implies a fairly substantial short-run impact for a given long-run revenue loss. We confess to considerable uncertainty about our choice of multipliers for this element of the package .
Romer & Bernstein base most of their conclusions on some rules of thumb (the term is used five times in the report). Bernstein is a social worker rather than an economist, so he can be excused for not being up to speed on economic impact models. Romer, on the other hand has published several papers on tax policy and macroeconomics. One would think she would have applied some rigorous economic modeling to analyze a three-quarter of a trillion dollar package.
Tags: Economic Impacts, government spending, jobs, taxes