“Pass this bill!” So exclaimed President Obama this September, as he proposed a plan to shore up the American economy. Facing weak job growth, ailing manufacturing, and a housing sector still in the doldrums, the President offered a package of tax cuts and spending increases, which he asserted would kick-start recovery. In his emphasis of fiscal policy, the President enjoyed some theoretical support. As Harvard economics professor Greg Mankiw points out, “One of the unusual things about this recession is that monetary policy hasn’t been enough.” Yet a combination of high expense and poorly designed programs may ultimately doom the Preisdent’s proposal. If they seek to move America out of recession, legislators must substantively rewrite the Obama jobs plan to make the bill effective in promoting long-term growth and justifying the costs.
Short Term Stimulus
The basis of the President’s plan focuses on stimulating demand. As former Treasury Secretary and Harvard University Professor Larry Summers states, “The overarching obstacle in short and medium term growth in the U.S. is a lack of demand. If we don’t succeed in increasing demand, it won’t really matter what the supply potential is.” As such, tax cuts comprise half the bill, including a one-year extension of the payroll tax holiday for employers and employees, and a credit for hiring the long-term unemployed. Economists claim that the cuts offer temporary incentives to boost disposable income, increasing consumption and motivating businesses to invest in production and labor. Mankiw echoes Summers’ sentiments, saying, “Anything that puts cash out the door will contribute to aggregate demand.” Another simulative aspect to the bill is direct infrastructure spending, which, as Summers suggests, “can increase demand, put people back to work, generate multiplier effects, and increase the quality of life for Americans going forward by increasing our economy’s capacity.” With interest rates at historic lows and construction unemployment at historic highs, now may be the perfect opportunity for such projects.
Some economists remain skeptical. Harvard economics professor Jeffery Miron claims that, at the federal level, “there are a lot fewer good infrastructure projects to do than people would assume.” Rather than simply fund projects to create demand, Miron suggests that projects should require a strict cost-benefit analysis. Indeed, Miron, Mankiw and Summers all agree that any infrastructure projects must be well-managed and well-designed. Thus Mankiw argues that infrastructure spending must be considered “in the context of long-term economic growth.”
Mark Zandi, chief economist at Moody’s Analytics, argues that this concern over returns strengthens the case for another part of the plan, the creation of a national infrastructure bank. Zandi claims that such a bank “would incent private capital into infrastructure development that would be driven more by economics than politics.” Whether the bank instead federalizes spending that should be done at the state and local levels, where the cost-benefit analysis can be done more effectively, nonetheless proves an item of considerable debate.
A Failure of Confidence
While the president’s plan contains several stimulatory measures, it is still unlikely to incentivize private sector hiring and investment on the scale needed to tackle unemployment and bolster growth. To start, payroll tax cuts for employers have historically minute effects on employment, because hiring new employees is a long-term investment. The tax cuts directed towards businesses that hire the long-term unemployed are particularly dubious, as they may not convince an employer to recruit a worker with minimal or outdated experience. Summers adds, “My judgment would be that we may need [employer tax cuts] for a longer time,” in order to make any significant dent in the unemployment rate.
Indeed, incentivizing investment generally requires decreasing business uncertainty and boosting expectations for the future. Since business investment is a crucial contributor to economic growth, any good policy should aim to improve that metric. While President Obama’s plan contains some investment incentives, like allowing businesses to deduct investment expenditures from their taxes through 2012, these are transitory benefits around which businesses cannot build their expectations. What businesses need is increased confidence and less uncertainty about the future.
The source of this uncertainty remains largely political. The nation faces a looming fiscal crisis, and businesses question government’s dedication to resolving it. They remain unsure what their taxes will look like next year, or what deductions they may lose. Indeed, temporary tax cuts combined with a lack of clarity in funding may increase business uncertainty. By contrast, structural tax reform, an element absent in the legislation, would promote clarity in the tax code and allow for permanent decreases in tax rates, with substantial benefits for economic growth. As Miron puts it, “Almost everyone believes that’s a no brainer, if only we could get there.”
Crisis in the Post-Crisis Economy
Opponents still argue that Obama’s plan is too similar to the $787 billion stimulus package passed in 2009. Zandi points out that, “While much maligned, this stimulus was a success. Without it, the economy would have suffered a much darker fate and the cost to taxpayers would have been measurably greater.” However, the economy has changed since then. The stimulus package passed in 2009, when immediate government spending sought to avert economic depression. Businesses were scared and the financial system had all but collapsed, so looking to private-sector investment to increase aggregate demand would have been futile.
Today, businesses have amassed huge profits that they are not investing, and banks hold onto capital instead of lending. With low interest rates, high savings, available labor, and fiscal constraints on government spending, private business investment is both imminently possible and highly desirable. Businesses and banks have the funds necessary to kick start long-term economic growth; what is missing are government incentives to increase confidence and get these funds flowing. In that sense, the President’s goal – to immediately put people back to work – is more reminiscent of a crisis response to abate economic contraction than the structural reform necessary to strengthen growth.
Overall, the current jobs bill provides some limited support for long-term growth, but remains too short-term in scope and insufficiently focused on increasing business investment through structural tax reforms. Private investment must underlie significant recovery, and since businesses focus on the long run, politicians must as well. We should think of our economy not as submerged in crisis, but as laden with opportunity. The time to incentivize is now. Obama himself suggested in his speech that we must, “start building an economy that lasts into the future.” Unfortunately, Obama’s jobs plan does not adequately accomplish this goal. Legislators should in upcoming months work to improve this bill.
Thomas Gaudett ’14 is the Circulation Manager. Daniel Backman ’15 is a Contributing Writer.