Sunday, September 11, 2011

Why Obama's jobs bill makes sense

This recession and recovery has been terrible. More jobs were lost, and they're taking longer to come back. Why is that, and what can government do to help?

The recession was caused by the breaking of the housing bubble. Housing prices dropped by about a third. This had a particularly strong effect on consumers because many of them had a large percentage of their net worth tied up in their homes. As a result, the average Americans' net worth fell by almost 25% during the recession. To make up for this shock, and given the uncertainty in the labor market, many Americans have started saving instead of spending. Given that consumer spending makes up about 70% of the economy, that's a recipe for a recession and a slow recovery.

It's also a recipe for making Republicans' plans for across-the-board tax cuts ineffective. Untargeted tax cuts are likely to be saved, particularly those tax cuts given to top earners, adding to the piles of cash banks are already sitting on. Money saved is not as stimulative as money spent, as we need people buying things to mkae up for the drop in consumer spending. Untargeted tax cuts might also be used to buy things from overseas.

Republicans are also pushing for corporate tax cuts. Corporate income taxes in America already add up to a smaller total, as a percentage of GDP, than corporate income taxes in any other OECD country. Corporations are sitting on a record amount of cash. Corporate profits are at an all-time high. I have yet to see any convincing evidence that jobs will come if we just give corporations just a little bit more, but that's what Republican candidates are proposing.

Obama's preference in the American Jobs Act for targeted tax cuts, including payroll tax cuts and tax credits for hiring veterans and long-term unemployed, ensures that any lost government revenue is spent specifically on the best solution, American jobs. Instead of giving tax cuts to people who may or may not use it to add jobs, Obama's plans will only give tax cuts to job creators. And instead of labelling every rich guy and job-cutting corporation a "job creator" as the Republicans do, the only way to get tax benefits is to actually create jobs.

1 comment:

NWest said...

You're right - giving corporations a tax cut won't help for the big ones hiring.

What it may do is make it easier for the *small* corporations to compete against the large multinational ones. And it's the small ones that do most of the job creation - your local 25 employee HVAC contractor, a 100 employee custom manufacturer, etc. The multinationals can keep profits overseas, while the local folks have to pay full amounts.

The Keynesian liquidity trap is fun thing to talk about but the fundamental truth is that households are overleveraged, and we *need* to have more savings, since debt-based investment is finally starting to break down (it couldn't last forever).

We need to fix the fundamental problems in the tax code & regulatory environment, not just kick the can down the road with short term fixes that just mean a worse adjustment in the future.