Obama’s American Jobs Act a step in the right direction

Last Thursday, President Obama gave an address to a Joint Session of Congress to propose his $447 billion American Jobs Act. At the face of it, $447 billion seems like a fairly large proposal, and to an extent it is. It’s nearly 50% larger than the pre-speech consensus figure of $300 billion, and over half the size of the 2009 American Recovery and Reinvestment Act. However ,once we get down to the details of the proposal, the price tag obscures just how much new economic activity the act will create.

The single largest part of the proposal is extending and expanding the payroll tax cut at a cost of $175 billion, roughly 40% of the total cost. Normally, the employee payroll tax rate is 6.2%. However, because of a deal the President cut in December 2010 to extend the Bush-era tax cuts, the rates have been lowered for one year by 2%, which translated to approximately $1000 in additional income for the average family.

Courtesy of http://img.ibtimes.com/

Extending this portion of the tax cut is not new stimulus. It is merely a preservation of the status quo. It prevents anti-stimulus from occurrin — nothing more and nothing less. But if there were ever a policy no-brainer that could get bipartisan support, this is it.

But in addition to merely extending the tax break, the President has proposed expanding it so the rate would further fall from 4.2% to 3.1% – half the original rate. So ,of the $175 billion the tax cut is projected to cost, about $60 billion would be new money in the economy, which is still a significant chunk of change.

In addition to the employee side tax cut, the President proposed cutting the employee side of the payroll tax from 6.2% to 3.1% for the first $5 million in payroll, and a complete tax holiday for firms that increase their payroll for up to $50 million dollars. Also, new capital investments would be 100% tax deductible. Combined, this part of the plan would cost $70 billion. These provisions are targeted at small businesses rather then large corporations, which are sitting on record levels of cash.

This course of action, while commendable, misdiagnoses the fundamental problem of our unemployment crisis. The problem isn’t that firms aren’t hiring because it’s too expensive for them to do so, but rather it’s that that firms don’t feel that there is enough demand for their goods and services to justify hiring additional workers. The tax-oriented portion of the plan might help on the margins, but it is a sub-optimal way to spur hiring and investment.

For the real bang in the proposal, we have to turn to the $200 billion in spending. The biggest chunk of spending, roughly $85 billion, comes in the form of aid to the states. $35 billion of that will be used to prevent teachers, police and firefighters from being laid-off.

This is again not new spending. It’s filling in budget cuts that states have been forced to make due to the economic downturn. This isn’t to say such spending isn’t important — it very much is — but it isn’t going to bring unemployment down by itself. It’s just acting to preserve the status quo.

The remainder of the package, though, will act to bring unemployment down in the short run. Of the $50 billion remaining for aid to the states, $30 billion will be used to repair and modernize schools and community colleges. This part of the plan is easily my favorite. It is both an investment in today by getting construction workers employed, and an investment in our future because of the improved facilities students will receive throughout the course of their education.

Another $5 billion will directly support young and low-income workers by directly funding summer and year round job programs and $57 billion will be used to aid the long-term unemployed, who have been hit hardest during our unemployment crisis. This is one of the best forms of stimulus — since the unemployed have a very low savings rate, every dollar we put in their hands is a dollar that will be spent purchasing goods and services, directly increasing aggregate demand.

Finally, $50 billion will be used for infrastructure spending, and $10 billion will be used to capitalize a national infrastructure back that can leverage public and private dollars to fund projects of regional and national importance.

Even during full employment, more infrastructure spending is desirable given our nations decrepit network of roads, railroads, sewers, bridges, tunnels and the infrastructure bank in particular is a good way to ensure that our investment in infrastructure is always well-financed and free of political interference.

All in all, the plan is a step in the right direction. It’s a very moderate proposal, and while it won’t bring us to full employment anytime soon, it will brighten the economic outlook drastically. Most mainstream economists believe that if the plan were enacted without amendment, we would avoid a “double-dip” recession and unemployment would fall to around 8% by 2012. It’s nothing heroic, but it’s definitely an improvement over doing nothing.

The only question remains, then, is will it pass? Early indications say some of it could pass, maybe, but Republicans have no incentive to act. The unfortunate reality for America is that it is in the Republicans’ best political interest to avoid co-ownership of the economy and for the economy to be as sour as possible in 2012. Politico even quoted a senior House Republican aide saying as much: “Obama is on the ropes; why do we appear ready to hand him a win?”

Over the past 3 years of his Presidency, Republicans have been good at saying no, and have been very, very successful by doing so. Obama seems to recognize this dynamic and, for the first time, the President seems committed to overturning it is using the aggressive language progressives have been waiting for since 2009.

His sudden use of feisty, “us versus them” rhetoric has finally given me, dare I say it, hope.

Peter is a junior. You can reach him at pgross1@swarthmore.edu.

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