We need a refresher course in Job Creation 101 to judge how much, if at all, U.S. President Barack Obama’s proposed $447 billion program of spending increases and tax cuts might revive America’s sputtering job machine.

Recall that the private sector is the main employment engine. Businesses create jobs when two conditions are met. First, extra demand for their products justifies more workers. Second, the extra demand can be satisfied profitably. There are qualifications to these generalizations (startups, for instance), but these are the basics.

As for government, it’s less a job creator than a job changer. It supports jobs (soldiers, teachers, scientists) by taxing, borrowing and regulating. If government taxed, borrowed or regulated less, that money would stay with households and businesses, which would spend it on something else and, thereby, create other jobs. Politics determines how much private income we devote to public services.

To this observation, there’s one glaring exception. In a slump, government can create jobs by borrowing when the private economy isn’t spending. But the effect is temporary and isn’t automatic.

Obama’s controversial $825 billion “stimulus” program in 2009 conformed to this logic. He claims it created or saved jobs. I think he’s right. At the time, consumers and companies — terrified by the financial crisis — had gone into lockdown. The new government outlays and tax breaks induced spending that otherwise wouldn’t have occurred. How many jobs were saved or generated is harder to say. The Congressional Budget Office estimates a peak total somewhere between 1.4 million and 3.6 million.

By similar logic, the new package might raise employment. Macroeconomic Advisers, a well-known forecasting firm, estimates the program could add 1.3 million payroll jobs by yearend 2012. However, it also notes the effect would be temporary unless Congress renewed the program.

Unfortunately, the story of the original stimulus is more complex. It was only a partial success, because it failed in its main mission: triggering a strong, self-sustaining economic recovery. Typically, this happens when pent-up demand for cars, appliances and housing boosts spending and hiring, which support more spending and hiring.

This process has been weak. Even with the stimulus, we lost 8.75 million payroll jobs in the slump; so far, we’ve regained only 1.9 million jobs.

This weakness has many possible explanations. One is the severity of the housing collapse. Potential buyers are waiting until prices reach bottom. Another is Americans’ eroded financial position. Since 2007, households have lost $7 trillion in wealth, mostly from lower home and stock prices. To restore that wealth, many Americans are saving more, spending less and repaying debt.

Exactly, say advocates of more stimulus. Condition One for private-sector job creation isn’t met: Demand is insufficient. Slowdowns in the United States and Europe confirm this. Governments need to “borrow and spend” to bolster demand, writes Martin Wolf, the Financial Times’ economic commentator. Deficit reduction should be long-term.

It’s a strong argument — but hardly airtight. Crucially, it doesn’t say why the past year’s continuing massive stimulus (huge budget deficits, low interest rates) didn’t do more for economic growth. The answer, I think, is psychology. Small changes in precautionary behavior by anxious consumers and companies offset stimulus. Suppose, for example, consumers raised their savings rate by three percentage points; that would neutralize three quarters of Obama’s program.

The surprise and brutality of the financial crisis left a powerful legacy of risk aversion. Companies — like consumers — have become defensive. They accumulate a cash hoard against unknown threats. Our political leaders have also compounded the caution and fear; indeed, government policies sometimes cause unwanted behavior.

Start with Obama. He has run two parallel administrations, pretending he could pursue separate jobs and social agendas as if they were unrelated. His health care “reform,” by requiring employer-paid insurance, will raise employment costs. Did he really think this wouldn’t affect the profitability of hiring? (See Condition Two above.) Many Obama policies frustrate job creation.

Switch to Capitol Hill. It’s more of the same. Republicans and Democrats exult in vitriolic attacks on each other. Their pleasure from mutual vilification comes at the public cost of lower confidence. By contributing to this, the disarray over long-term deficits also undermines employment.

Our jobs debate should acknowledge these realities. No policy will succeed unless it results in self-sustained hiring by private firms. This means giving job creation precedent over other goals. It means conducting the debate so that the nation’s spirits — and hence, private spending — are not further depressed by partisan rancor. It suggests taking proposals from both parties, because neither can be sure its approach will work.

It ought to be about building confidence, not scoring political points. This is a tall order. As the 2012 election approaches, it may be too tall.

© 2011 Washington Post Writers Group

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