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.

Posted by Jim Newton on Sep 13 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.