Obama's Jobs Plan: Great Theater, Uncertain Policy

By :: September 9th, 2011

When you get right down to it, the jobs plan President Obama proposed before a joint session of Congress last night was built on three elements:  A large payroll tax cut, lots of new spending on public infrastructure, and a promise that its $447 billion cost would be paid for with yet-to-be disclosed tax hikes and spending cuts.

As political theater, the speech was terrific. It was a powerful defense of government—words his base has been longing to hear since the 2010 election. It challenged Republicans to “stop the political circus” and work with him to boost the economy—a poll-tested argument that appears to have strong support among many Americans. And the often dispassionate president sounded
as if he really cared.

As substance, his plan, called the American Jobs Act, combines the bold with small-bore, Bill Clinton-like subsidies for carefully selected interests. Mixing short-term stimulus with long-term deficit reduction is perfectly sensible. But did Obama get the right mix?

By far his most ambitious idea is to extend through 2012 and expand the payroll tax cut that was due to expire at the end of this year. His plan, which would reduce federal revenues by $170 billion, would cut the worker share of the payroll tax to 3.1 percent from 4.2 percent (it was 6.2 percent prior to this year’s tax holiday). At the same time, it would cut the employer share to 3.1 percent from 6.2 percent on the first $5 million of payroll. Firms that add workers or give current employees raises would pay no wage tax on up to $50 million in new payroll.

On the spending side, Obama would give $85 billion to state and local governments to, among other things, build and repair schools and hire (or rehire) teachers, spend $50 billion on transportation, create a $10 billion infrastructure bank, and spend $55 billion to extend unemployment benefits for another year and otherwise  help the long-term jobless.

At the same time, the plan is filled with promises that have political pizazz—extra tax breaks for companies that hire veterans, the long-term unemployed, low-income youth, and first-responders—but many are warmed-over ideas he’s proposed before.

Finally, he promised to help Americans refinance their mortgages. This could prove to be the most important step of all, except he offered no real plan.

What would all this do for the economy? It would help some, but even if Congress did pass it, don’t expect magic.

Extending and expanding the worker payroll tax cut will continue to put cash in people’s pockets-- as it did this year. At the very
least, continuing the tax break won’t shrink consumer demand, which might happen if the payroll tax break is allowed to expire at year's end.  It isn’t likely to create many new jobs, however.

With much of the recent job loss caused by state and local government layoffs, renewed aid to states will help some.  More infrastructure spending is necessary but, as we learned over the past few years, a lot fewer of these projects are “shovel-ready”
than Obama once hoped.  It may take a while for those bucks to work their way through the economy.

The tax breaks for companies that hire vets and the like probably won’t increase hiring at all. It will encourage firms to employ targeted workers, but at the expense of those who are not on the preferred list. The payroll tax cut for employers may also help some, but not much. And many profitable firms will enjoy a windfall for hiring workers they would have hired anyway.

Finally, while Obama vowed to pay for all of this over the long-run, he didn’t say how. That will be left, he said, for the coming days. In the long-run, the way he fills in those blanks will be as important as what he said last night.

When you hire Carnegie Hall, you better put on a blockbuster show. President Obama raised expectations by delivering his jobs plan to a joint session of Congress. He delivered a strong performance. But we still don't know if his plan will be as impressive as his rhetoric.

7Comments

  1. More Economists React: Gauging Impact of Obama Jobs Proposal – Real Time Economics – WSJ  ::  12:15 pm on September 9th, 2011:

    […] […]

  2. Michael Bindner  ::  2:06 am on September 10th, 2011:

    This plan won’t do much. Avoiding a recession, while necessary, is not sufficient to end the current economic depression, which is characterized by asset prices depressed below what is owed on them. Considering the government holds the bonds or mortgages behind half the bad debt, it could write it down without too much hassle – especially if the debt were sold to the Federal Reserve.

  3. AMTbuff  ::  12:41 pm on September 10th, 2011:

    >a promise that its $447 billion cost would be paid for with yet-to-be disclosed tax hikes and spending cuts.

    This looks to me like another example of spending the same money twice. The super committee is already required to come up with $1.2T of tax hikes and spending cuts.

    Suppose Obama sends a list that of tax hikes and spending cuts that copies the least unpopular of the measures the super committee is considering. Then the super committee would have to come up with $450B more from much more painful sources, with Obama having grabbed the easy pickings.

    Unless Obama proposes offsets that were not already likely to appear in the super committee’s list, his offsets are not really a source of new money. It will be spending money that was already committed for deficit reduction.

    This scenario reminds me of past political campaigns where candidates would claim that $100B (or whatever amount) raised from taxing the rich would pay for X. The same candidate would then say that this tax increase on the rich would pay for Y. Then that it would pay for Z. It was presented as if the same money could be spent 3 times.

    This proposal is a new twist on a very old game.

  4. Vivian Darkbloom  ::  6:57 am on September 11th, 2011:

    This is a very astute observation, although one might also label it “saving the same money twice”. One way to deal with it would be to simply raise the Super Committee’s target to $2 trillion from $1.5 trillion (you cite $1.2 trillion as the current Committee target, but that is the amount of spending reduction that will automatically occur if they do not succeed, so one could also raise that to $1.7 trillion). I would also make passage of the spending bill contingent on successful passage of a measure that meets the Super Committee’s revised targets. This could be done by simply rolling both provisions into the same bill. And, I would insist on a better short-term jobs package that concentrates more on investment and less on more money for paying people not to work.

  5. Ralph H  ::  9:35 am on September 12th, 2011:

    It is hard to see these measures working. My little company should save 25K and my wife and I 6K which will be very nice, but as we are close to retiring we will save this, not spend. I think extending unemployment will help keep the unemployment rate high. I do think the infrastructure projects should help, except that there will be a tendency to use most of it to delay cutting teachers rolls; delaying the inevitable cuts that will occur when subsidies end.

    I would suggest that if he wanted to increase jobs he pay the next 3 or 5years of unemployment insurance, as most employers (like me) have learned NOT to add workers unless we are absolutely sure they will be needed in the future because you pay dearly for anybody who is let go. This is why most additions are temporary or part time workers, and also why you NEVER hire someone who has been unemployed over 6 months, as you have a potential costly person with little motivation to get off the rolls until collection time ends. The extra time is costly to a companies fund.

  6. Steve Williams  ::  1:07 am on September 13th, 2011:

    I hate to say it but the US is in for some tough times. It strikes me, and many others that all great powers have a rise and fall. History is full of examples… its this the swan song of the US?

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