CBO: Unemployment Benefits Extension an Economic Booster

Unemployment benefits, payroll tax cuts could be the most effective fiscal policies.

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New estimates from the nonpartisan Congressional Budget Office suggest that increasing aid to the unemployed could be the best policy for near-term job creation in the United States. Tax breaks for businesses and infrastructure spending, meanwhile, are not likely to boost short-term growth.

According to estimates released today by the CBO, increased unemployment aid could, over the course of 2012 and 2013, add 0.4 to 1.9 dollars to the GDP per dollar spent, by far the largest increase for any of the options studied by the CBO. Reducing employers' payroll taxes could add up to 1.3 dollars. The effect for reducing business' income taxes, meanwhile, is 0.3 dollars at most. For infrastructure spending, it's 0.7 dollars.

[Read about why the world's biggest economies are headed for a slowdown.]

The new estimates come as the country simultaneously faces an economic crisis and a deficit crisis. GDP growth was at a sluggish 2.5 percent in the third quarter, and the unemployment rate has been stuck at or above 9 percent for seven months. Meanwhile, the so-called congressional super committee is scrambling to determine a way to cut $1.4 trillion from the deficit before its November 23 deadline.

The difficulty of this situation was highlighted at a Senate Budget Committee hearing today, when CBO Director Doug Elmendorf told senators that the short-term spending increases and tax cuts are likely the best paths to growing the economy, as long as they are offset by medium- and long-term adjustments to government spending.

"Under current policies, U.S. fiscal policy is on an unsustainable path," said Elmendorf.

When Budget Committee Chairman Kent Conrad of North Dakota asked how increased spending now can ultimately benefit the economy, in light of current ballooning deficits and debt, Elmendorf responded that it will be crucial for the country to balance short- and long-run economic needs.

"It's not really a paradox," Elmendorf told the committee, later explaining, "In the short term, most economists agree the constraint on our output and incomes today...is principally weak demand for goods and services."

Increasing that demand, therefore, is the key to growth, says Elmendorf: "In the short term, what can strengthen the economy is cuts in taxes or increases in spending."

[See analysis of the latest U.S. jobs report.]

That boost to demand may have to come soon; unemployment benefits are set to expire at the end of the year. As The Hill reports, lawmakers are currently fighting over the process of passing an unemployment benefits extension.

Elmendorf acknowledged that some policies are more effective over the long term than the short term, with infrastructure as one key example. Conrad emphasized the importance of infrastructure in his home state, where he says a booming oil industry requires better transportation routes.

"We need to build roads. That could employ thousands of people," said Conrad.

Elmendorf agreed that infrastructure does not create significant jobs in the short term simply because of the sometimes lengthy processes involved in identifying and approving projects, but said that in the longer term the effects can be larger.

Congress members seem to agree that economic growth is priority one in the United States. Agreeing on how to achieve that is a major roadblock, and it is one for which the CBO has little guidance.

When Delaware Democratic Sen. Chris Coons asked Elmendorf to list the three best economic growth policies that could also attain bipartisan support, Elmendorf demurred. "Senator, I'm about the 10,000th most politically knowledgeable person within five miles of this building. So I'm not the person you'd want to ask about what's politically viable." He added, "All we can do is to offer our analysis of what we think is more or less effective."

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