The current temporary 2% payroll tax cut was scheduled to expire at the end of the year. Obama proposes extending it and increasing the cut to 3.1%. Obama also called for $105 billion for schools, roads and other types of infrastructure spending, although this time, he refrained from using the phrase “shovel-ready” which he used inaccurately in promoting the 2009 stimulus bill. He is also proposing a new program to encourage banks to refinance underwater mortgages, replacing the largely failed Home Affordable Refinance Program which is due to expire next June.
His proposal calls for a payroll tax break for small businesses which hire new employees, but even that was not an innovation. It is similar to a bipartisan plan enacted last year called the HIRE Act.
Under Obama’s version of the idea, firms that hire more workers or increase salaries of existing employees would face no added payroll taxes, but the tax break would not apply to big corporations, which presumably are already sitting on up to $2 trillion in cash that they could use for hiring.
Nigel Gault, chief U.S. economist with IHS Global Insight, was skeptical that these business employer tax cuts would wind up creating many permanent new jobs because they would only last for one year. “How much extra incentive is that going to give a business [to start hiring]?” he asked.
PROPOSAL DRIVEN BY THE RE-ELECTION CAMPAIGN
It was painfully obvious that Obama’s speech was driven by the political necessity for him to demonstrate some progress in job creation that voters would notice before next year’s election. That is why Obama’s plan consists almost entirely of short-term stimulus measures, or tax reduction proposals which might be difficult for Republicans to resist.
The White House has been building up Obama’s new job plan. Ever since the deal to resolve the debt ceiling crisis was finalized last month, the White House had been promising that Obama would present a comprehensive solution to jump start lagging employment which has been dragging down the recovery.
But instead of staying in Washington to finish off the plan, Obama took off most of the month of August to go on a golfing vacation at the exclusive Martha’s Vineyard resort favored by those “millionaires and billionaires” he loves to bash in his class warfare re-election rhetoric. Meanwhile, the rate of job creation which he kept promising to address, fell to zero for the month.
Upon his return from vacation, the White House continued to build up expectations for the job proposal by calling for a joint session of Congress at which Obama would present it to the nation.
PETTY POLITICS IN SCHEDULING THE SPEECH
The White House denied accusations that it asked for the joint session to be scheduled to upstage a nationally televised GOP candidate debate which had long been set for that same night. It was no surprise that congressional Republicans insisted that the joint session be scheduled for some other night.
In the end, Obama’s speech wound up being little more than a warmup for the first professional football game of the season. The game proved to be far more interesting than Obama’s speech, which was a combination of a re-election stump speech and a dull rehash of the same old big spending stimulus proposals which have failed to restart job growth over the past two years.
Listening to the language of Obama’s speeches, you would never know that Congress already had passed Obama’s $800 billion stimulus plan shortly after he took office two years ago. On February 24, 2009, he promised that, “over the next two years, this plan will save or create 3.5 million jobs,” in a speech to a similar joint session of Congress. While it is impossible to measure how many jobs were saved by that stimulus package, the US economy has almost 2 million fewer jobs than when he made those remarks. At that time, the administration promised that the first stimulus package would hold unemployment below 8%. Today it is at 9.1%. That, in a nutshell, sums up the challenges which Obama and his reelection campaign faces Even Democrats admit that if he had to run on his economic record today, Obama could not be reelected.
CHALLENGING THE REPUBLICANS
Afterward, many congressional Republicans said that they were surprised at the aggressive tone of Obama’s speech. Some Senate Republicans called it the most defiant of the five speeches he has delivered to joint sessions of Congress since taking office. “It was designed to prove to his base that he’s a strong leader,” Senator John Thune said afterward. “He projected an intensity we haven’t seen in previous speeches.”
Freshman Republican Congressman Adam Kinzinger, of Illinois, said of Obama, “he was out there saying ‘Pass the bill,’ before he began discussing what was in the bill, and you had half of Congress get up and clap. . . . It was a little bit of a fighting speech.”
NOTHING NEW TO OFFER
Stephen Stanley, the chief economist at Pierpont Securities, was unimpressed with Obama’s plan. He said that, “It looks like an amalgam of things we’ve already seen. I don’t know why you would demand a joint session of Congress to deliver such a pedestrian package.” Stanley suggested that Obama would have done better by, “offering up something new, even if it didn’t turn out to work. That would at least give the impression that you’re willing to experiment and try different things and that you haven’t given up.”
Obama has been openly daring the Republicans to oppose any of the provision of his jobs plan. He told the joint session of Congress, “there should be nothing controversial about this piece of legislation. Everything in here is the kind of proposal that’s been supported by both Democrats and Republicans in the past, including many who sit here tonight.”
However, Obama ignored the obvious problem. If these ideas failed to work two years ago, why should they work now?
Republican Senate Minority Leader Mitch McConnell raised that point when he said, “it shouldn’t be very surprising that there would be two very different points of view about how to solve this particular crisis. What is surprising is the president’s apparent determination to apply the same government-driven policies that have already been tried and failed.”
Earlier, when he first learned the general outline of Obama’s proposals, McConnell said on the Senate floor, “This isn’t a jobs plan; it’s a re-election plan.”
ANOTHER “SOAK THE RICH” PROPOSAL
The speech to the joint session of Congress was embarrassingly short on details, including how Obama plans to pay for his job plan’s half-trillion dollar price tag without adding substantially to the federal budget deficit. But that did not prevent Obama from repeatedly demanding its immediate passage in a series of political appearances across the country which followed the speech to Congress.
Obama did not unveil the draft bill he was sending to Congress on Monday. At that time, Jack Lew, the White House budget director, revealed that Obama proposes to pay for the plan with a familiar combination of tax increases on businesses and upper income individuals which the White House has been pushing, and Republicans have been rejecting, since Obama took office. These include limiting the value of tax deductions for upper income taxpayers, as well as job-killing tax increases on US oil and gas companies, hedge funds, and companies that own their own aircraft.
Republicans were quick to renew their objections to Obama’s familiar “soak the rich” class warfare tax proposals. A spokesman for House Speaker John Boehner said that the taxing proposals failed to show the “bipartisan spirit” that Obama has been calling for. His deputy, Eric Cantor, said that it was inappropriate to pay for Obama’s job creation proposals “with a massive tax increase on job creators.”
OBAMA AT A LOW POINT IN HIS PRESIDENCY
Obama is now at a low point in public support for his presidency. Not only are voters furious with him over the persistently high unemployment rate, they also blame him for the debacle which resulted from his attempts to raise the debt ceiling this summer. It has undermined public confidence in his ability to oversee the government’s basic functions.
His advisers now realize that Obama’s latest sharp drop in his job approval ratings was because the public ultimately held him responsible for the messiness of the debt ceiling deal, and for failing to reach a grand bargain to reduce the deficit which GOP House Speaker John Boehner and then the Senate bipartisan “Gang of Six” offered to him.
In his speech, Obama recognized the cynical public mood. “I know there’s been a lot of skepticism about whether the politics of the moment will allow us to pass this jobs plan, or any jobs plan.”
Noting that many strategists in both parties now believe that any meaningful progress in Washington will have to await the outcome of the 2012 election, Obama said, “the next election is 14 months away. And the people who sent us here, the people who hired us to work for them, they don’t have the luxury of waiting 14 months. Some of them are living week to week, paycheck to paycheck, even day to day. They need help, and they need it now.”
But it was just one throwaway line aimed at trying to win back some of the independent voters whose support he has lost since taking office. The bulk of his speech widened Washington’s partisan divisions by appealing to the agenda of his liberal base. Once again, he failed to reach out across the political aisle as he had promised voters he would do when he ran for president in 2008.
ANOTHER STOPGAP MEASURE
Economists said that many aspects of Obama’s jobs plan are, in fact, defensive in nature. For example, failing to extend the 2% payroll tax break would mean millions of Americans would suddenly see their paychecks shrink by that amount in January.
“This is the challenge of any temporary stimulus package,” said Donald Marron, a former economic adviser to President George W. Bush. “On the front end, you get stimulus and then on the back end you get anti-stimulus, and the economic weakness has persisted so long that we’re now on the back end.”
Conservative economist Douglas Holtz-Eakin predicted that if enacted, the plan would make little difference. “It’s a philosophy that is more of the same – more temporary policies of a stimulus nature on the tax and infrastructure side that are unlikely to be significant enough to move the dial. It’s more political than real.”
Former Congressional Budget Office Director Robert Reischauer noted that in concentrating on extending current relief programs, “the president is picking the battlefields upon which he wants to fight Republicans,” and where he believes that, “he has the crowd on his side.”
Republicans who were previously lukewarm about extending the tax breaks that are in the bill, see the political danger and are indicating a greater willingness to at least consider some of the ideas in Obama’s plan.
There “are areas that we can work together on, specifically in the area of small-business tax relief,” Eric Cantor said immediately after Obama’s speech. Small businesses are “the real job engines,” he added.
Senator Rob Portman, a member of the bipartisan 12-member congressional supercommittee which is charged with finding a solution to the deficit problem, criticized Obama for “doubling down on his failed” policies and for spending too much time in his speech “assigning blame.” Many other Republicans believe that too many elements of the president’s current stimulus plan, like the last one, will add to the deficit without creating enough new jobs to justify their cost.
ROMNEY’S JOB CREATION PLAN
GOP presidential candidate Mitt Romney, who issued his own package of job creation proposal several days before Obama’s speech, issued a statement saying that the president was 960 days late in issuing a jobs plan, implying that he should have given the jobs problem his full attention immediately upon entering the White House.
If he is elected president, Romney has proposed 5 measures which he claims could result in the creation of 11.5 million jobs. He would reduce the corporate tax rate from 35% to 25% in order to stop US businesses from relocating overseas. He also would implement free trade agreements with Panama, South Korea and Colombia. Romney is also proposing the elimination of all taxes on capital gains and dividends for people with incomes under $200,000 a year, in what he calls a “Middle Class Tax Savings Plan.” Finally, Romney would eliminate the estate tax, which often has a devastating impact on small family-owned businesses.
DOUBLE DIP RECESSION NOW MORE LIKELY
Mark Zandi, chief economist at Moody’s Analytics, who has advised Democrats in the past and supported the original stimulus package, warned that failing to pass its extensions in Obama’s current jobs plan could cut economic growth next year by 2 percentage points.
“It would be very hard on the economy,” Zandi said. “Even in a good economy it would be difficult. But in this economy, it would raise the risk of [a double dip] recession to unacceptable levels.”
He called Obama’s new proposal “a laudable effort to try to boost the economy and the job market over the next 18 months. It’s big enough to turn fiscal policy from being a significant headwind to a modest tailwind.”
But Zandi also said that when Obama’s new stimulus package ends, the economy would slow again, and the nation would still face the same level of unemployment in 2014 that it would have otherwise, a historically high 6.4 percent.
According to a February 2010 report by the nonpartisan Congressional Budget Office (CBO), the most cost-effective of the short-term stimulus measures being proposed by Obama are the extension of the payroll tax breaks and unemployment assistance, and tax breaks for new business investments.
NO SOLUTIONS FOR THE ECONOMY’S LONG TERM PROBLEMS
Economists agree that while Obama’s new plan might meet some of his short term political goals, by putting more money into people’s pockets and spurring hiring before next year’s election, it fails to address the more fundamental problems responsible for the weakness of the American economy. Obama still has no solution for the overhanging mortgage debt created by the bubble in the US real estate market which triggered the financial crisis of three years ago.
Millions of Americans still owe more on their mortgages than their homes are worth. They will be unable to engage in normal financial activity or sell their homes as long as those mortgages are still underwater. As long as that remains the case, these economists warn, all any government stimulus can do is provide temporary relief.
However, Atif Mian, an economist at the University of California at Berkeley said, “once you have removed the debt burden from households, you’ve taken care of the problem.”
The Obama administration says that it is working on a new plan to support more mortgage refinancing for underwater loans. However, it is still unwilling to attack the heart of the problem by proposing significant forgiveness of mortgage debt, out of fear that such a program would reward those who bought homes which they knew they could never ultimately afford to pay for. Economists warn that without a way to eliminate underwater mortgage debt, the US economy will never be able to fully recover, and relief from any stimulus plan will remain only temporary.
Joel Prakken, the chairman of Macroeconomic Advisors, argues that the danger of a double dip recession is so great that even a temporary boost from a new stimulus plan would be worth the cost. “The economy’s weak now, so you want more job creation and spending now,” he said.
Zandi agrees, saying that the most important reason to pass Obama’s new stimulus plan is “to insure we don’t get back into recession.”
HOW WILL OBAMA PAY FOR IT?
During his address to the joint session of Congress, Obama said that he intends to pay for the $447 billion cost of his latest jobs stimulus bill without adding to the deficit, but did not say how. Later, the White House said that it would be covered by Obama’s blueprint for additional deficit reduction measures that he will present to the 12-member congressional supercommittee on September 19.
Obama said his deficit reduction proposal will include spending cuts, modifications to Medicare and Medicaid, and tax increases for the wealthy and big corporations.
“We can reduce this deficit, pay down our debt and pay for this jobs plan in the process. But in order to do this, we have to decide what our priorities are.”
Republicans on the supercommittee are likely to propose some of the debt reduction provisions contained in House Budget Committee Chairman Paul Ryan’s 2012 budget proposal, which calls for major revisions the structure of Medicare, and reject Obama’s familiar proposals to eliminate the Bush era rate reductions for higher income taxpayers.
MAKING THE SUPERCOMMITTEE’S TASK EVEN HARDER
Even before Obama made his new job creation proposals, many Washington observers were doubtful that the supercommittee would be able to agree on how to achieve its original goal of reducing the federal deficit by $1.5 trillion over the next decade. Finding ways to cover the added half-trillion dollar cost of Obama’s job stimulus program with offsetting reductions would increase the size of their task by nearly one-third.
After the president speech, the supercommittee’s Republican chairman, Congressman Jeb Hensarling said that the president’s proposal made the “already arduous challenge of finding bipartisan agreement on deficit reduction nearly impossible.”
Fellow Republican supercommittee member Senator Pat Toomey, accused Obama of attempting to “pass the buck.”
The bipartisan panel of six senators and six congressmen has already started its negotiations. It is working against a November 23 deadline that was set by the deal which resolved the debt ceiling crisis this summer. That gives the group just 10 weeks to craft a comprehensive bipartisan agreement on spending and taxes that has eluded Congress and the White House for years.
DIFFICULT CHOICES AND UNPALATABLE ALTERNATIVES
Both Democrats and Republicans are already nervous about giving so much power to a handful of lawmakers working outside the normal legislative process. Democrats worry that the panel will agree on a plan that makes sharp cuts in entitlement spending, while Republicans worry about the possibility that the supercommittee will slash defense spending even more than current Obama administration plans.
The supercommittee’s rules are fashioned after those governing the congressional commission which comes up with military base closing proposals. If the bipartisan members of the supercommittee can reach agreement on a debt proposal, other members the House and Senate will have no opportunity to change its provisions. They must vote to either accept or reject the entire proposal, with no amendments or filibusters allowed.
If the members of the supercommittee are unable to reach an agreement, or if they reach an agreement that the House or Senate votes down, then the deficit ceiling deal reached over the summer kicks in. It would impose deep automatic cuts in both social welfare and defense spending which both Democrats and Republicans would very much want to avoid. That unpalatable alternative is the main incentive for members of both parties to reach a bipartisan agreement.
PROSPECTS FOR THE ECONOMY DETERIORATING
The bottom line on the president’s new proposal is not encouraging. Even its proponents concede that it is a primarily intended to prevent a further slowing of the weak recovery by extending previous stimulus measures that are set to expire.
The White House has been forced to sharply scale back its previous forecasts for 2011 growth. Economists have now increased estimates of the likelihood of a double dip recession. At best, they expect unemployment to remain well above 8% by Election Day next year. All of Obama’s efforts to stimulate the economy since taking office have failed to address its most serious underlying problems.
Obama’s new job creation proposal is nothing more than another politically motivated temporary stimulus program. Like the last one, it is unlikely to justify its high cost, and will seriously complicate the already daunting task of trying to bring the nation’s deficit spending problem under control.
ADDING TO THE PROBLEM INSTEAD OF PROVIDING A SOLUTION
Republicans and many economists fear that Obama’s new jobs plan will only add to the country’s long term economic problem, without significantly improving the jobs picture. Even a best case scenario for its impact would leave millions of long-term unemployed American workers still jobless and increasingly hopeless, while further increasing the nation’s debt burden.
Republicans are increasingly convinced that the right solution to the nation’s problems is to take a long-term approach to revive the competitiveness of the American economy. This requires a combination of initiatives to bring down the level government spending to sustainable levels, a major revamping the federal tax code to restore incentives for private investment and eliminating the stifling hand of excessive government regulation. This would spark a revival of the entrepreneurial spirit which first made the United States the richest and most successful country in the world.
