CBO: Policy Options to Boost Employment

The Congressional Budget Office yesterday released Policies for Increasing Economic Growth and Employment in the Short Term:

This testimony summarizes the outlook for the labor market and assesses the potential impact that a variety of policy options would have on economic growth and employment. Some of the options that CBO analyzed would reduce taxes on individuals or increase aid to the unemployed and others, thereby increasing households’ disposable income and boosting demand. Other policies would increase the flow of cash and reduce taxes for businesses, which would encourage them to invest and hire and thus increase employment. Additional options would increase federal spending by investing in infrastructure or providing aid to state governments, which would strengthen demand for goods and services and reduce further losses of state and local government jobs.

CBO concludes that further policy actions, if properly designed, would promote economic growth and increase employment in 2010 and 2011. The policies analyzed vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the timing of those effects. Policies that could be implemented relatively quickly or targeted toward people whose consumption tends to be restricted by their income, such as reducing payroll taxes for firms that increase payroll or boosting aid to the unemployed, would have the largest effects on output and employment per dollar of budgetary cost in 2010 and 2011. By contrast, policies that temporarily increased the after-tax income of people with relatively high income, such as an across-the-board reduction in income taxes or an increase in the exemption amount for the alternative minimum tax (AMT), would have smaller effects because such tax cuts would probably not affect the recipients’ spending significantly.