The recession has been much deeper than the administration was expecting when the stimulus was being devised in early January. They have since lowered their forecast (NY Times 5/11/09). Independent forecasters have also become more pessimistic. The Wall Street Journal June 5-9 survey of forecasters predicts unemployment will be 9.8 percent in June 2010 (Izzo, WSJ, 6/11/09). These forecasts incorporate the expected effects of the 3.5 million jobs created or saved by the $787 billion stimulus plan already passed. Brad Delong (June 17, 2009) now sees only a 30% chance of a rapid V shaped recovery. He concludes with “I do not understand why the Obama administration is following policies that presume such a rapid recovery --a V rather than an L for the shape of the recession--is not just possible but probable.” He recommends doubling the fiscal stimulus. The Democratic Congress elected in 1976 faced a similar situation--high (7.5 to 7.9 %) unemployment and anemic (3.4% during 1976) employment growth. It responded with a temporary New Jobs Tax Credit (NJTC) for 1977 and 1978 that lowered the marginal cost of expanding your workforce by roughly 15 percent on average (more for low wage and high turnover firms). Despite foot dragging by the IRS, one third of the nation’s private employers received NJTC credits that lowered their 1978 taxes by $3.1 billion. By the final quarter of 1978, real output of non-farm business had grown 15 percent in two years and unemployment had dropped from 7.8 to 5.9 percent. Private employment rose 11.5 percent from January 1977 to January 1979. In the 70 years the BLS has collected monthly data on private employment, this growth rate over a 24 month period was exceeded only three times--entry into World War 2, demobilization after WW2 and entry into the Korean War. The two-year percentage increase in total hours worked in the non-farm economy also set a record for the past 50 years as did the increase in the employment-population ratio. The 1974 recession hit bottom in the first quarter of 1975. Private sector output grew 7.7% in the next 4 quarters, slowed to 4.0% and 4.7% in the next two years and then accelerated to 7.5% during 1978. Total hours worked grew slowly during the first two years of the recovery--3.4% and then 2.0%. After the NJTC passed Congress, hours worked started rising more rapidly—by 4.5% in 1977 and 5.8% in 1978. The NJTC appears to have temporarily boosted the growth of both output and labor input. As one would expect, the subsidy of labor costs seems to have had much larger effects on labor input growth than output growth. A tax credit for increasing jobs in the U.S. encourages firms to use existing plant and equipment more intensively (eg. by staying open longer, increasing overtime or hiring additional workers). And indeed capacity utilization did increase from 81.5 percent in December 1976 to 86.6 percent in December 1978 while the NJTC was in effect. That 86.6 percent rate of capacity utilization in manufacturing, mining and energy utilities has not been exceeded since. Over the last 30 years capacity utilization has averaged 81.3 percent. What happens when a marginal employment tax credit expires? Do employers immediately reduce their work force? Apparently not. During the subsequent 12 months, output and payroll employment continued to grow albeit at a slower pace and the employment-population ratio and unemployment rate were stable. Manufacturing employment peaked in June 1979. Industrial production was stable. Capacity utilization slowly declined as new capacity was brought on line. Apparently, the temporary character of the employment subsidy induced some employers to expand now rather than later. When the subsidy ended, the new hires were retained and those who left were replaced. Then two huge negative shocks hit the nation— the Iranian Revolution and the Iran/Iraq war caused oil import prices to increase by 160% and the Federal Reserve responded with a tough anti-inflationary monetary policy. These shocks caused the recessions of 1980 and 1982-83. The 1977-78 NJTC had a number of features that helped it succeed. It was: (a) easy to describe, (b) cheap to administer and audit, (c) directly related to measures of employment routinely reported to the IRS, (d) generous [a substantial share of the cost of hiring additional low-wage high-turnover workers], (e) limited to firms expanding their work force by at least 2 percent over the previous year (f) could not be gamed by changing business ownership. (Firms buying ongoing businesses assumed the 1976 employment threshold of the acquired business. Startups got half the rate of subsidy of firms with a track record of employment prior to 1977.)