CBO: Stimulus Bill Could Meet Obama's Job Creation Goal in Short Term

In an analysis of the $900 billion version of the stimulus bill currently being debated in the Senate, the nonpartisan Congressional Budget Office says that the bill could meet President Obama's goals for job creation and increase GDP—at least in the short term.

But by the end of 2011, the total number of jobs created would be half of what it was in 2010. And by 2019, the bill could actually reduce GDP, although by only 0.1 to 0.3 percent.

The letter, sent yesterday to Sen. Judd Gregg and copied to eight other leading legislators, estimates that the bill would stimulate the economy the most in 2010. By the end of that year, the analysis estimates, 1.3 to 3.9 million jobs would be created. The unemployment rate would be 0.7 to 2.1 percentage points lower than the 8.7 percent forecasted. And GDP would increase from 1.2 to 3.6 percentage points over a baseline forecast.

But after another year, CBO estimates, the bill's effects would diminish. GDP would be 0.4 to 1.2 percentage points higher than otherwise, 0.6 to 1.9 million more jobs would be available, and unemployment would be lower by 0.3 to 1 percentage points. And in 2019, thanks to the national debt, the GDP could actually be slightly lower than if the government had done nothing.

Compared with the House bill, therefore, the Senate bill would stimulate the economy faster, CBO director Douglas Elmendorf writes in the letter. But its impact would also be more diminished by 2011. The differences stem mainly from three of the Senate's additions: A $70 billion provision to spare about 24 million taxpayers from the alternative minimum tax, a $20 billion expansion in funding to states, and a decrease in withholding from the "Making Work Pay" credit.

Dollar per dollar, a temporary tax cut affects the GDP less than a dollar of spending, the CBO says. That's because taxpayers usually save a significant portion of the cut. But changing who receives the tax cut and for how long can ensure that more of it gets spent. Consumption rises the most if taxes are slashed for lower-income households and for longer, Elmendorf writes.

Meanwhile, the CBO says that spending, such as on infrastructure, has "relatively large effects" on GDP. But infrastructural projects also take a longer time to pay out, meaning that their stimulative effect—while "significant"—would be mainly apparent from 2010 through 2012. 

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