Another disappointing year; another stimulus proposal
In what appears to be an annual ritual, a president has proposed yet another stimulus plan to reinvigorate economic growth and put Americans back to work. This seemingly never-ending series of quick-fixes began in the final year of the Bush administration with temporary tax rebates (at $150+ billion), followed by a huge fiscal stimulus package in 2009 (with an approximate cost of $830 billion), an end-of-the-year measure in 2010 (with an estimated 10-year price tag of $850 billion), and now the latest jobs proposal of 2011, which will set the nation back another $447 billion. All told, these four efforts to pump life into an ailing economy come in well north of $2 trillion.
At each step along the way, the claim was made by a president that millions of jobs would be created (or saved) and the resulting increase in aggregate demand would so infuse increased consumer confidence and private-sector activity into our nation’s economic psyche that further stimulus efforts would be unnecessary. And in each instance, the next year brought another proposal, another promise of favorable economic change, and (at least with the first three) another bitter disappointment.
So, is the latest “here’s the one that will finally work” jobs proposal likely to do the trick? Let’s consider its major components and the probable impact on the private sector, which in the final analysis, must be the source of change that will turn around American labor markets.
The lion’s share of the $447 billion package comes from a variety of tax reductions, with most centering upon payroll taxes. In last year’s effort, the 6.2 percentage point tax rate that employees pay into the Social Security and Medicare programs was cut to 4.2 percentage points, with no change in the matching payments made by businesses. The hope was that the added disposable income hitting workers’ paychecks would produce more consumer spending. Unfortunately, as this one-year effort was unfolding at the beginning of 2011, the prices of both food and energy skyrocketed and siphoned away most of the additional take-home pay.
In this year’ proposal, President Obama is suggesting that worker’s payroll contributions be cut even more (to 3.1 percentage points) and businesses get a similar reduction for the first $5 million in payrolls. And if a business hires new workers, all payroll taxes for those new employees would be forgiven for one year.
Again, the million dollar (or should that be hundred billion dollar?) question becomes: Will this stimulate hiring? Setting aside Keynesian theory and just thinking logically, ask yourself this: If you were a business owner and the government offered you a couple of thousand dollars to hire in new workers, would you do so? And keep in mind, consumer confidence and added spending are low, uncertainty is high and the total cost of hiring in that worker and providing various benefits may be well above $50,000 for a position that pays the worker’s salary of, say, $40,000. While this most recent stimulus package is obviously different that past ones, actual experience to date suggests the answer may well be no.
The other major portion of the 2011 Obama proposal involves added government spending. Included in this $194 billion spending effort are funding for an infrastructure bank; extended unemployment insurance coverage for another year; monies to state and local governments to keep some public sector jobs from disappearing (think teachers, firefighters, etc.); a summer-2012 student jobs program; tax credits for companies hiring the long-term unemployed (those out of work for more than six months); and funds for direct infrastructure spending on roads, bridges, schools and the like.
So, do you think there is something so significantly different in the latest batch of proposed spending that it will jump-start an ailing economy when others in the past did not? Or will this be yet another temporary effort that will do little to change the uncertainty in the lives of people and businesses and thus simply pile more debt onto future taxpayers, even as Americans are told it will be “paid for” by offsetting spending reductions in the future.
And even if it does work (or not) what happens in January 2013 when all of the one-year tax cuts that people and businesses experience in 2012 come to an abrupt end and full payroll tax obligations resume. Another recession? Another temporary fix? One has to wonder when will it all end and policymakers finally enact legislation that provides a long-term solution.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.