Sunday, November 23, 2008

How much will it cost to create 2.5 million new jobs?

I applaud P-E Barack Obama's commitment to create 2.5 million jobs over the next two years. Now, the question is how much that will cost. I will make several assumptions:

  1. The goal is decent-paying middle class jobs that really do make a step forward in revitalizing the decimated middle class.
  2. The jobs would pay in the $50K to $100K range, or an average of $75K.
  3. Most of the jobs should be sustainable and not go away as soon as the fiscal stimulus spigot shuts off.
  4. It will take at least two to three years of federal stimulus before the private sector picks up the slack and federally-stimulated jobs become full-fledged private sector jobs. I will assume three years, just to be safe.
  5. We will create 1.25 million jobs in the first year and another 1.25 million jobs in the second year.

In addition to the cost of salary, there are also benefits, health care, retirement contributions, corporate overhead, and the profit margin needed for the private sector to want to preserve the job once it is created. Altogether, I estimate that stimulating a single $75K job will cost about $200K, per year, for three years, or a total of $600K over three years.

We can create five jobs for $1 million a year, or 5,000 jobs for $1 billion per year, or one million jobs for $200 billion per year, or 1.25 million jobs for $250 billion per year, or 2.5 million jobs for $500 billion per year.

So, if we create 1.25 million jobs in the first year the cost will be $250 billion. Creating another 1.25 million jobs will cost another $250 billion in the second year, plus another $250 billion to sustain the new jobs from the first year. Then it will cost $500 billion to sustain all 2.5 million jobs in the third year.

Over three years that total cost will be $250 billion plus $500 billion plus $500 billion or a grand total of $1.25 trillion dollars.

Yes, I would certainly hope that the private sector would pick up the slack well before three years, but there is too much potential for unexpected difficulties to feel very comfortable with that assumption.

Also, part of the stimulus will in fact flow back to the federal government in the form of taxes, but some unknown portion of that will also be lost to tax credits, especially as corporations are likely to initially receive some tax credit to create these new jobs.

Although some of the new jobs could be created in state and local governments, it would be better for job creation at that level to be funded by an increase in local and state tax revenues from the new jobs.

I would also argue that a significant percentage of these jobs, especially infrastructure rebuilding and maintenance really should be permanently part of the federal budget and not strictly simply a one-time stimulus expense. Say, something on the order of 20% of the jobs or 500 thousand jobs or 250 billion over three years or $100 billion per year on an ongoing basis.

In summary, we need to permanently increase the federal budget by $100 billion per year to cover "normal" infrastructure rebuild and maintenance, and then spend an additional $200 billion in the first year, plus $400 billion in the second year and third years for non-infrastructure jobs. The non-infrastructure or "stimulus" total would be $1.0 trillion. The infrastructure job cost over that three years would be $250 billion. The total would be $1.25 trillion.

There should probably also need to be a sharp increase in infrastructure usage fees to help make infrastructure projects at least partially pay for themselves. Otherwise, those projects end up being funded by general tax revenue. Ultimately, that is a "social" or political question of what share of the burden of infrastructure cost should be shouldered by users versus everyone as an integrated society.

-- Jack Krupansky


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