By Christopher Haight
July 2011

The United States currently faces twin economic challenges - growing the national economy (more specifically, lowering the unemployment rate) and shrinking the national debt. However, if you were to listen solely to the rhetoric and heated exchanges taking place in Washington, you could be forgiven for thinking our only problem is debt, debt, and more debt. The over 14 million individuals who remain without a job have become a tangential issue to the ongoing debate over debt.

The recent unemployment numbers provided further evidence that jobs should continue to be a priority for policymakers. In the first week of July, the U.S. Department of Labor reported the unemployment rate rose to 9.2 percent, with the U.S. economy generating a net gain of only 18,000 jobs. To put that in a more meaningful perspective, a net gain of over 300,000 jobs per month is required to bring the jobless rate back down to a pre-recession level of five percent within five years.

Since 2008, economic stimulus measures have included:

• American Recovery and Reinvestment Act (ARRA): More commonly known as the Stimulus or Recovery Act, ARRA provided over $700 billion in economic support, including over $200 billion in the form of grants, loans, and contracts. This included highly notable programs such as Race to the Top, High-Speed Rail, and Energy Efficiency and Conservation Block Grants, among many others.
• Hiring Incentives to Restore Employment Act (HIRE): The HIRE Act passed in March of 2010 and provided tax credits to businesses that hired new workers throughout the year.
• Extension of the 2001/2003 tax cuts and reduction in employee payroll tax: The end of 2010 brought a new agreement on a two-year extension of the Bush-era tax cuts and a two percent reduction in the employee-paid payroll tax.

Unfortunately, these measures have had only a limited effect in reducing unemployment and spurring economic growth. It would be a fallacy to argue though that just because unemployment did not return to normal levels that any or all of these measures were ineffective. For example, the Congressional Budget Office (CBO) still estimates the ARRA saved or created up to 3 million jobs.

The Great Recession ultimately exacted a far greater toll on the U.S. economy than anyone predicted, including some of the key players in the Obama administration responsible for ARRA. For example, Christine Romer, an economic adviser to the President from 2008 to 2011, estimated unemployment would peak at only eight percent with an enacted stimulus bill. Also contributing to the sustained unemployment has been the gains in productivity, which enabled companies to sell more without necessarily employing more people. Indeed, corporate profits are roughly back to their pre-recession levels and U.S. firms have nearly $2 trillion in cash on hand to invest.

The U.S. economy desperately needs a new impetus for growth, even if that means more deficit spending in the short-term. Nearly every fiscal commission - bipartisan, nonpartisan, or otherwise - has promoted the idea of short-term deficit spending to induce long-term economic growth. One of the most commonly promoted ideas has been to reduce temporarily the employer-paid side of the payroll tax in order to make hiring less expensive.
Peter Orszag, President Obama's first Director of the Office of Management and Budget, recently posited tying such a tax break to the unemployment rate. In effect, Orszag's proposal would reduce the employer-paid payroll tax (currently 6.2 percent of wages) until unemployment hit a certain level (say, five or six percent). While this is appealing on many economic and political levels, it is unclear if the medicine fits the diagnosis.

A look at some main drivers of unemployment reveals the payroll tax may not be what is holding back hiring:

• Demand: Businesses are loath to take on new employees when consumer spending is still weak. The run-up in oil prices due in part to the political turmoil that engulfed the Middle East did little to ease these concerns. Even with the temporary tax incentives to hire, businesses may still be better off doing more with less if demand is not predicted to increase. To address this, backers of this argument tend to believe further direct public investment is needed to offset the lag in private demand.
• Structural Unemployment: Proponents of this idea, including former President Bill Clinton, argue a large part of the problem is that the unemployed workers simply do not have the necessary skills, knowledge, and experience to qualify them for many open positions. Businesses have likewise reported challenges in filling positions with qualified candidates. The answer, at least in part, is investing in training programs to retool the U.S. workforce for a globalized, 21st century economy.
• Public Job Losses: Even while the private business community hires - albeit at a less than desirable pace - the public sector is shedding jobs. The U.S. Department of Labor reported government agencies slashed 39,000 jobs in June continuing a downward trend in public sector unemployment. While the reduction in public workforce may be good, bad, or indifferent from a range of ideological perspectives, it is hard to argue its immediate effect is anything but counterproductive; for a family, a lost paycheck is a lost paycheck, no matter from where it came.

In order to support further increased economic growth, Congress can use grants to embark on further simulative measures that address each of the concerns listed above. Much like the original stimulus bill, grant funding should be a major component in investing in America's future - with some important changes.

For example, the original ARRA included the State Fiscal Stabilization Fund (SFSF), which provided large formula-based grants to each state largely purposed for sustaining jobs in schools. A renewed stabilization effort should aim to assist states avoid large job cuts while also reforming the way states do business.

One of the most commonly sought-after purposes we hear at Grants Office is a desire by public agencies to increase their efficiency in operations. The Federal government can capitalize on this demand and invest more in the national economy simultaneously. A new bill should repurpose the spirit of the highly-touted Investing in Innovation program, funded for education reform efforts under ARRA, towards government services.

Much like the education version of Investing in Innovation (i3), a government-focused i3 should not restrict applicants to a single priority - as needs, circumstances, and challenges can differ vastly across the country. A "Gov i3" may include such priorities as:

• Innovations that Support Data-Driven Decisions: The original i3 included emphasis on the effective use of data and this priority should not be exclusive to the field of K-12 education. This may include bolstered efforts and systems to collect and analyze data at various agencies or could support specific data-collection for research into improving government effectiveness (for example, evaluating whether or not a new service is cost-effective).
• Innovations that Support Inter-Agency Collaborations: Inter-agency collaborations also literally gained currency in the field of education through the new Promise Neighborhoods Program that provided grants up to $500,000 for projects
• that could replicate the success of the Harlem Children's Zone (HCZ) in New York City. HCZ and the grants it inspired sought to break down the traditional barriers between traditional educational and social services. Gov i3 could support new efforts to increase overall effectiveness by increasing cooperation or shared services among local agencies.
• Innovations that Support Cost-Effective Operations or Productivity: This innovation area should address the actual investment in physical equipment or capital upgrades many public agencies are seeking. The Federal government already has a range of incentives in healthcare for upgrades to Electronic Medical Records (EMRs) and there should be no reason to restrict technological incentives to one industry if they can prove beneficial in quality of services and cost-effectiveness.
• Innovations that Support Local Economic Development: Local or municipal governments should be given the resources to retrain their workforces to meet local needs. Projects supported under this category could be as traditional as workforce development programs or more creative ones that allowed re-granting of funds to local businesses to stay in the community and train new hires.

These Gov i3 grants should also be awarded competitively and award points on objective measures as well as the more traditional subjective review of proposals, project management, and budget. Objective considerations should definitely include economic indicators, specifically the current unemployment level and historical six-month trend. Communities with unemployment rates higher than the national average should be given priority, as should communities that can demonstrate a sustained or increasing level of joblessness. This would allow the most devastated communities to stand a better chance to receive the support they desperately need.

Another important objective measure should be external sources of funding, whether from an agency's own budget, private or community-based foundation, or state governments. Like other grant programs that require a matching component, this measure would help gauge community-wide commitment to and support of a project and increase its likelihood of sustainability into the future. Applicants should also be required to document the number of jobs supported and created as a result of the funds.

These kind of objective measure would help replicate qualities of programs such as the Distance Learning and Telemedicine program (which also uses metrics of economic need) to ensure grant funds are spent where they are needed most.

In addition to a Gov i3 program, any new bill should consider the continued of support of industries that serve national economic, security, and environmental interests. Specially, an emphasis on energy efficiency measures should be further enhanced. As it currently stands, many grants that directly support purchase and installation of energy efficiency are limited and administered separately by each state. This results in a fractured funding landscape nationally, as some states, such as the New York State Energy Research and Development Authority (NYSERDA), offer a plethora of grants, loans, and tax incentives for a range of energy-related activities, while others offer little assistance - if any.

Congress should consider an extension of the Energy Efficiency Conservation Block Grants (EECBGs) as a Federal funder of energy efficiency measures. In order to make a renewed program as flexible as possible, EECBGs should be available for all kinds of improvements including installation of alternative energy systems, upgrades to lighting or electrical systems, retrofitting buildings, etc. A smaller version of EECBGs should also be made available to individuals, akin to the very popular Cash for Clunkers program that offered consumers rebates to trade in older automobiles for newer, more fuel-efficient ones.

An energy program of this kind would have two key benefits: the first, instigating demand in the energy industry for upgrades and alternative energy sources. Secondly, the reduced consumption and costs should assist making some marginal improvements over time to public budgets.

These are but two kinds of publicly funded grant programs that could address the need for economic investment, governmental reform, and longer-term economic strategic thinking. Another key area often touted as ripe for investment, especially at a time when interest on public debt is relatively low, is for upgrades in transportation for both traditional infrastructure such as roads and bridges, as well as new-to-America modes like high-speed rail.

Of course, public grant funding alone cannot resurrect the American economy. Grants take time to solicit, review, and award, making the fiscal impact less immediate than tax cuts implemented with the next paycheck. Still, fiscal stimulus focused solely on tax reduction may not adequately address the fundamental problems of demand and structural unemployment. Lowering taxes even further with so many people out of work and marginal tax rates at historical lows is likely to have a muted effect on demand as most people seek to save or pay down existing debts. And tax cuts alone cannot spur companies to hire if they cannot find the right individuals for the jobs at hand. As for the public sector, further reduction in government revenues (at any level) would likely hasten even more public job losses leading to an even higher unemployment rate.

Grant funding can and should be a part of a renewed effort to put more Americans back to work, in combination with other targeted measures. The proposed ideas here could help agencies, businesses, and nonprofit organizations maintain and increase employment levels while setting the stage for cost-efficiencies later. Awarded competitively, these grants can also be targeted to generate optimal results.

Ultimately, the creation of responsive, flexible grant programs that help local agencies and organizations will accelerate widely-shared prosperity throughout the economy while help shaping a government and economy fit for the 21st Century.