Sara D. Davis/Getty Images
President Barack Obama speaks about his proposed American Jobs Act on Sept.14, 2011 in Raleigh, North Carolina. Obama is stumping for his $450 billion jobs proposal in the wake of the Democrats losing a U.S. seat to Republicans in a special election in New York.
President Barack Obama speaks about his proposed American Jobs Act on Sept.14, 2011 in Raleigh, North Carolina. Obama is stumping for his $450 billion jobs proposal in the wake of the Democrats losing a U.S. seat to Republicans in a special election in New York. Sara D. Davis/Getty Images
Read More About Obama's Jobs Plan
Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC.
President Obama created big expectations last week for the speech where he announced his new jobs plan. Remarkably, his rhetoric came close to fulfilling them. But what about the actual plan he sent to Congress on Monday? If it were to be enacted in its current form (which it won't), would it have a shot at turning around the economy? As it turns out, there are definitely some things to like in Obama's roadmap, even while there are some very big warning signs as well.
On the plus side, President Obama asked for a sizable package. The cost would be $450 billion, with most of the expense in the 2012 fiscal year. By contrast, after removing the fix to the alternative minimum tax, the 2009 stimulus package came to about $300 billion a year in both 2009 and 2010. After seeming determined to think small, Obama is asking for something resembling real money. Of course, this is still well short of what is needed to get the economy back to full employment. The collapse of the housing bubble led to a falloff in housing and consumption demand that together is close to $1.2 trillion annually.
The mix in the plan is also better than might have been expected. President Obama proposed $35 billion in aid for state and local governments to prevent more layoffs of school teachers, police, and firefighters. This is a great way to boost the economy since there is no quicker way to increase demand than to prevent cutbacks that would otherwise occur. While the request in this area is good news, it could have usefully been two or three times as large, although a larger request would face a greater risk of being laughed off by the Republicans in congress.
President Obama also proposed $80 billion for infrastructure. 30 billion of this is for repairing and renovating schools and $50 billion is for other infrastructure needs. The downturn has provided a great opportunity to modernize our infrastructure. We can essentially borrow at zero cost (real interest rates are negative) and there are millions of unemployed construction workers. The money requested by Obama would be a step in the right direction, if Congress were to approve it, but it is nowhere close to the sort of grand infrastructure modernization vision many had hoped for.
As always, we must remember infrastructure spending takes time. Even if Congress passed Obama's bill "now," as he demanded, we would be lucky to see even one-third of this money spent in 2012. This is fine because we have every reason to believe that the economy will still need a boost in 2013, 2014, and 2015, but no one should think that this spending will create jobs tomorrow.
The package also includes the essential continuation of extended unemployment benefits. This is both a boost to the economy and provides essential support to millions of workers who have been unemployed for more than 26 weeks. These workers will lose benefits if the extended benefits program expires at the end of 2011.
On the somewhat-more-worrisome side, Obama also proposed extending the 2 percentage point payroll tax cut to employees and increasing it to 3.1 percentage points (half of the Social Security tax). He also proposes to apply an equal size tax cut to the employer's side of the tax on the first $5 million of business payrolls. There are two issues raised by this proposal.
First, the tax cut on the employer side is largely a gift to businesses that mostly do not need it. As a group, businesses are sitting on huge amounts of money and pulling in a record share of national income in profits. Giving them even more money is unlikely to have much effect on generating demand or creating jobs. On the plus side, limiting the tax cut to the first $5 million of payroll reduces the cost. It also means that at least some of the money will go to struggling businesses that really need it.
The second, more important issue raised by the tax cut is its linkage to Social Security. We are being told that it is the Social Security tax that is being cut, but there is no reason that Obama's proposed tax cuts have to be tied in any way with the Social Security tax. Congress can vote to give whatever amount of tax cuts or credits that it wants to whichever individuals and businesses it wishes. There is no reason that the tax cuts have to be tied to Social Security's solvency. The fact that they are linked raises some real concerns.
Under President Obama's proposal, the Social Security trust fund would be credited with an amount equal to the lost tax revenue from the general budget, so in principle it is not affected by the tax cuts. However, as a practical matter, there is a serious issue about how this tax will be raised back to its 2010 level.
Restoring the 2010 tax rate at the end of next year, or whatever point the economy no longer needs the boost, will likely be portrayed as a tax increase on working people by Republicans and those seeking an overhaul of Social Security. (The Democrats have already given us a preview of this pitch, attacking Republicans who oppose extending the payroll tax cuts for wanting to raise taxes on working people.) If the Democrats can't find the political will to restore the 2010 Social Security tax rate, then the program will soon face the serious revenue shortfall that has been advertised for decades.
That is not good news at a time when the collapse of the housing bubble has made the program more important than ever to retirees. We should be discussing ways to enhance Social Security to ensure that retirees have adequate income. Instead, we may see increased pressure to cut benefits if these tax cuts are made permanent.
Continue reading at The New Republic.