Monday, September 12, 2011

President Obama's Frankenstein Stimulus of Old Ideas

Is my title too harsh?  I will let you decide.

The President gave a very uninspiring speech that presented old ideas for rejection providing more stimulus ($450 billion) than expected ($300 billion), although it is little to small economic stimulus creating less jobs than needed strung out over too long of a time with little immediate jobs effect whenever begun.  His speech lacked any display of leadership and looks more like a political play to get the political opposition to vote either against a "jobs" bill or come up with another ultimately inadequate stimulus.  The 2009 stimulus is largely acknowledged as having been too small and not fast enough in implementation with $800 billion, reduced from an economic recommendation of $1.2-1.3 trillion, when the recession was actually much deeper and should have required approximately as much as $3 trillion to get the job of resilient recovery done.  The bullet points, without any details of how the points will be developed or implemented, are here as provided by the White House.  Considering some journalists and selected bloggers, such as Krugman, had advance copies embargoed for two weeks, the analysis forthcoming after the speech has not been particularly deep in effort. 

Calculated Risk provides a succinct synopsis of the parts and money breakout.  Kash Mansoori sees a larger stimulus than I do in the extension of unemployment benefits, extension of payroll tax cuts, infrastructure spending, state and local government jobs, and mortgage refinancing, while finding the employer payroll tax cut, extending 100% financing for businesses, and tax credits for hiring veterans negatives.  Mike Konczal, while noting the Obama Administration has been overly optimistic, provides a more deliberative appraisal of the parts, but he believes the tax credits will substantially boost employment, which I do not.  Mark Thoma found the proposals bolder than expected, but worries, correctly, that the spending is being funded by front loaded budget cuts which negatively impact aggregate demand which slows growth.  The wrong thing to do at this point in time.

We have already written several times on the problems of continuing high unemployment and slowing growth, including the most recent August unemployment figures.  Lets take a some additional looks at where we are on growth and unemployment besides our article above.  Between 2007 and 2010, the United States ranks just below Portugal and just above Iceland, Spain, and Ireland in the negative percentage of change in total civilian employment.  The post recession job picture shows substantial job contraction in all employment sectors except mining and logging, temporary help, motor vehicles and parts, and manufacturing (although at a significantly slower rate of growth).  In comparing past jobless recoveries in 1991 and 2001 with 2009, the 2009 jobless recovery comes out much worse and ineffective.

The American Jobs Act is designed to cease at the end of 2012.  Menzie Chinn believes it will stimulate GDP and cites the textbook approaches.  Extended unemployment and infrastructure spending will help sustain aggregate demand.  He refers to Macroeconomic Advisers and their projections of a $300 billion stimulus estimating 1.3 million new jobs (remember the inadequate ARRA of 2009 created 1.2 million jobs) by the end of 2012 and a 1.3% boost in GDP.  At $450 billion, the boost in GDP might be closer to 2%, but the effect would tail off quickly.  Chinn also quotes extensively from Ezra Klein's summary of economist's reactions.  Chinn does lament that Congress has done little to nothing in regard to real financial reform to prevent a new financial crisis.

Felix Salmon is fully in favor of mortgage refinancing, which is another part of the proposal that has no detail as to how it would be done, and believes the benefits out weigh any costs to the government if it paid off the bondholders, because he believes the CBO study on the subject assumes 100% pay off to the holders of the mortgage backed securities.  Calculated Risk finds the CBO study reasonable in its conclusions.  That is the problem of not having the details to perform any analysis.

Private sector critics have dismissed the idea that any tax break or incentive will spur employment, because businesses hire when there is a demand for their products or services and the demand is not present.  This is consistent with my observations. In my observations, I have also provided other sources who do not find the payroll tax cuts providing enough stimulus to be meaningful in promoting sustainable employment and economic growth.  The infrastructure bank concept, which also lacks any detail, could be a good idea, but most concepts in this regard do not include sewage and water supplies.  The construction jobs will primarily be getting construction workers back to work or full time work.  Much of the infrastructure may also require public-private initiatives which could mean privatization of public enterprises.  For instance, high speed rail in Illinois means Union Pacific gets to keep all the improvements (and their current employees are doing all the work) and has no contractual or legal obligation to yield to passenger trains making high speed passenger trains half speed trains and, in the case of the State Capitol, dividing the City down the middle of it business district, medical district, and historic areas with two sets of tracks endangering the flow of emergency traffic and diminishing the quality of medical and historic sites.  It is all in the details.

Bottom line, what we are seeing here is a lot of old ideas being trotted out with little detail on how the parts would actually work and be implemented. Additionally, the implied attack on Social Security and Medicare through the payroll tax cuts and citing need for reform is unreasonable.  The problem with Medicare is the high costs of health care, provider fraud, and Part D having been purposefully designed with no government discount directly benefiting the pharmaceutical industry (for whom the author of Part D now works).  In my prior observations on what the President should say, I voiced my concern that pensions, such as Social Security, are deferred compensation not entitlements and health care is a basic human need of which the deprival is a violation of human liberty and life.

If you want to create jobs now, it is relatively simple.  Government becomes the employer of last resource providing real work and training on quality projects (not make work) in a variety of sectors for a base wage.  They could be part time jobs as well as full time jobs and jobs for teenagers as well as adults.  We would not have to worry about discrimination against older workers or veterans.  The Australian economist Bill Mitchell has tackled the issue of government being the employer of last resource and the economic arguments for and against and finds it efficient and simple.  In doing so, Bill Mitchell refers to the plan of two American Economists, Randall Wray and Stephanie Kelton, which would create a National Job Corps putting all unemployed Americans to work for approximately $300 billion; not the $450 billion proposed by President Obama which might create 1.3 million jobs by the end of 2012.

The United States is paralyzed with dysfunctional politics from both political parties and the President is not providing leadership in forming the political will necessary to get things done and to get them done for the American people.  President Obama could be a great President, but he has been too personally concern with deficits to face the harsh reality of over 16%, including discouraged workers, of the population being unemployed.  Jobs and growth come hand in hand and with growth comes increased government revenue, increased private spending, and less need for government spending to replace missing private spending to sustain aggregate demand.

Have we been too harsh on President Obama and will he step up to the leadership required of our times?  Has President Obama set his eyes on political compromise with a political opposition which would oppose compromise as each jockey for an election campaign advantage?  Will he end up ranking somewhere between Franklin Pierce and Herbert Hoover?  Even Franklin Roosevelt had to overcome his economic prejudices to deal with the times in which he lived and he learned some of his lessons the hard way as well as from mistakes.

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