obama’s “jobs” plan, et al

i imagine you all know that obama gave a nationally televised speech before a joint session of congress on thursday evening as a kickoff to his new proposed stimulus program, which is going by the name of the American Jobs Act; although no one in the administration used the world stimulus, the elements of the proposal are very similar to the allocations in the first stimulus, aka the American Recovery and Reinvestment Act, but roughly 3/5 the size: tax cuts for individuals & business, aid to the states, infrastructure, & an extension of unemployment benefits…as rumors all week pointed to a package of around $300 billion, which i characterized as pathetic when i first saw it, the $447 billion final figure was at least a surprise to the upside…even though neutral analysts (mark zandi of moody’s & macroadvisors) expect it will boost GDP growth over 1% in 2012, there are elements of it im not convinced will accomplish much in the way of job creation even if it should get thru congress intact, which is by no means guaranteed…

just as a lot of ARRA was misdirected (ie, 37% of it was tax cuts, including the sneaky $15 a paycheck less withholding), the biggest element of this package has a similar misdirection: a full $175 billion of this package is a one year extension & expansion of the payroll tax cuts first enacted in the december mcconnell-obama planaccording to the white house factsheet, this 3.1% cut will provide a 2012 tax cut of $1,500 to a typical family earning $50,000 a year…unlike most economists i normally agree with, i’ve never been too hot on tax cuts as a job-creating stimulus; they believe – and their models tell them – that tax cuts stimulate job creation by putting spending money into the hands of consumers; the theory is that as consumers spend, the increase in demand for products causes companies to ramp up production & hire more workers…although that might have been the case at one time, i dont think it works too well in our global economy…think about the first stimulus, where everyone was getting that extra $15 dollars each paycheck; typically, most of that weekly stipend was spent at walmart, & hence employed the chinese…similarly, i dont see much hiring resulting from that part of the “jobs act” although it may take some pressure off tight household budgets, and employ an extra walmart clerk and dockworker at the margin…(understand i’m only using walmart/chinese as a metaphor for the typical generic purchase of imported consumer goods) ..the other major tax cut that’s part of this proposal is a cut of 3.1% of the payroll taxes paid by businesses on their first $5 million in payroll, and a full one year holiday of 6.2% on new hires – again, i can’t see how this will create many jobs; the large corporations are already sitting on mountains of cash they arent deploying because the demand isnt there, and i cant imagine a small business hiring an extra employee for a 6.2% of pay incentive; they wont let the tail wag the dog...& there’s a big downside to cutting payroll taxes, too; these are the deductions that fund social security, and although the social security trust fund is still sitting on a $2.6 trillion surplus (here’s the list of treasury bonds it holds) reducing its ongoing funding only hastens the day when the program will need restructuring to pay full benefits (now 2037 as per the CBO)…

other tax breaks in this package include an extension of 100% expensing of business investments (a sector that already been strong throughout the recession), a $4000 tax credit for businesses that hire a worker who’d been unemployed over 6 months, and a “returning heroes” tax break of $5,600 to $9,600 for hiring an unemployed veteran; while those tax breaks may help solve specific problems, they’d tend to shift the mix of those who are hired rather than create additional jobs…

the other elements of the package are more promising; there is $35 billion of direct aid to states & localities to prevent further teacher layoffs (recall my post on that problem) and another $25 billion to repair & modernize schools; there’s also $50 billion for transport infrastructure (it should be 20 times that), $15 billion “rehabilitating homes, businesses and communities”, and another $10 billion for an infrastructure bank…there’s also a $49 billion extension of unemployment benefits, including a new program modeled after one in georgia which allows the unemployed to take temporary work or on the job training & still collect unemployment comp…

since most of the payroll tax cut, the investment expensing, and the unemployment benefits are extensions of ongoing programs, we’ll end up with less than the headline $447 billion of stimulus from this package, and we still have to wait for the other shoe to drop, because obama believes it must be “paid for” with cuts to other programs, which he’s expected to announce next week, likely with less fanfare than the “jobs act” rollout…that he suggests this must be paid for indicates that he’s bought into the republican meme that deficits are our overriding problem; but as i’ve noted, with interest rates this low – effectively negative when allowing for inflation – we should be borrowing whatever we need now and using our idle capacity to renovate our country’s infrastructure; a couple years ago the American Society of Civil Engineers graded various categories of our infrastructure: dams, sewers, bridges, the grid, et al & rated it with an overall grade D, all in need of repair; much of it is over 100 years old and obsolete…i know you cant build a new bridge or replace infrastructure tomorrow, so that should be a long range part of a package (unemployment is still expected to be a problem till 2017)…in the meantime, i’m sure everyone knows a few streets in the neighborhood that need chuckholes repaired…look around, what needs to be done? you have 14 million people looking for work, and another 20 million idle…we dont have to pay for it now; in fact, economist karl smith shows that with interest rates as low as they are now, we could eliminate all federal taxes today & borrow 30 years out, & make a profit on that borrowing if the country grows 1.1% annually or more over that 30 year stretch…by not borrowing now, when the rest of the world is paying us to borrow, and investing in infrastructure, renewable energy, job training, and our youth, we are missing a once in a lifetime opportunity…it’s not crazy or unprecedented; we had a higher debt/GDP ratio coming out of world war 2, and eisenhower ran deficits to send returning vets to college & build the interstate highway system, and the debt to GDP ratio came down during the 50s expansion anyhow (chart)…

although we did get a few decent economic reports this week, highlighted by an unexpected fall in our trade deficit, most of the other important economic news this week came out of europe; in fact, there have been rumors that greece might even default this weekend…the week started with a commitment by the swiss central bank to buy foreign currency in unlimited quantities (pdf) in order to keep the swiss franc at 1.20 per euro or less; the swiss franc had been seen as a safe haven & had appreciated so much swiss exports were being affected…(the japanese have been similarly trying to hold the yen down, so this might re-ignite the currency wars we saw last year around this time) …as the week went on interest rates in italy continued to rise in spite of ECB bond buying, as italy faced a worker strike protesting austerity measures as the plan was being debated in their senate…a challenge to the euro bailouts in the German supreme court was rejected (ie, the bailouts are not unconstitutional), but mandated that they be approved by the German parliament, which is expected to make it difficult for Merkel to respond to the crisis in a timely manner; greece’s economy continued to deteriorate, with their GDP now contracting 7.3% YoY, and with 1 year interest rates at 88.5% and 2 year rates approaching 57%, & under threats that the next tranche of bailout funds might be withheld, greece plans to cut another 20% of their public workers, or 150,000 more layoffs…but the big news that crushed the markets on friday (despite what you heard from the right wing talkers, the markets didnt crash because of obama’s speech) was the resignation of german Jurgen Stark from the ECB and the news that Germany was putting a plan into place to bailout their banks when Greece defaults

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me

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