Even as the U.S. economy shows signs of improving — lower than expected unemployment last month and stock market gains — there are looming dangers. To combat them, President Barack Obama on Tuesday unveiled a plan to create more jobs. The question, as with all else in Washington these days, is how to pay for the initiatives. The answer should not be simply to add more government spending, but to cut elsewhere to devote needed resources to job creation.

More important, lawmakers must ensure that current jobs aren’t eliminated as states cut their spending to balance budgets and that those already out of work continue to receive benefits, which allows them to spend money on consumer goods, which is a major contributor to the economy’s health.

Congress is debating an extension for long-term unemployment benefits, which were part of the stimulus package but run out this month. If Congress doesn’t enact a fix quickly, an estimated 1 million workers will stop receiving benefits next month. This is a major concern as unemployment hovers around a record high 10 percent.

In a 2003 analysis of stimulus plans, Mark Zandi, chief economist for economy.com, found that extending unemployment benefits has the largest positive effect by generating $1.73 for every dollar of cost. Second was state fiscal relief at $1.24.

As for state fiscal relief, the Center on Budget and Policy Priorities warns that without further federal help, states will continue, by necessity, to cut their spending, including laying off employees. This will only exacerbate the current economic woes.

State budget cuts could lead to the loss of nearly 1 million jobs nationally, the left-leaning center warned.

Mr. Zandi recently told the Congressional Joint Economic Committee that these state budgetary actions “will be a serious drag on the economy at just the wrong time.” ”For state and local governments to turn into a weight on growth will be a meaningful impediment to the broader recovery’s prospects,” he said.

To remedy this, he suggested that the federal government send more money to states to help with educational and health care expenses. Such assistance was included in the American Recovery and Reinvestment Act, but most of the federal funding will end next year.

This week, President Obama proposed more funding — he didn’t say how much, although he proposed to devote some unused bank bailout money to it — for infrastructure and home efficiency work and a tax credit for small businesses to create jobs. He also proposed state and local aid to avert layoffs.

Sen. Olympia Snowe encapsulated the concerns on Capitol Hill. While supportive of an extension of unemployment and health benefits for laid-off workers, as well as tax incentives and other help for small businesses, she worries about the cost of such efforts.

“While I support the continuation of pro-growth policies,” she said earlier this week, “given that the federal deficit for fiscal year 2009 was a breathtaking $1.4 trillion and the administration is projecting deficits of $9.1 trillion over the next 10 years, Congress must do more to pair the resources targeted to job creation with reductions in other areas.”

Congress must decide what investments will have the biggest benefits and put scarce resources there.

Bangor (Maine) Daily News