The American Jobs Act Targets Enduring Economic Change

Sep 12 2011 Published by under Uncategorized

Last week, President Obama told Congress they should pass the American Jobs Act right away.  Here is how President Obama’s American Jobs Act (hallelujah, a clear and simple name!) addresses what has happened to the economy while learning from the 2009 stimulus (ARRA).

WHAT HAS HAPPENED

The wealth gap between the top one or two percent of the country and the rest of us has been growing steadily for decades, but the 2008 crash really exposed the fact that much of the country had been living on an illusion of wealth.

People lost jobs, credit, and home equity all at once.  Though measurements are fuzzy, it’s fair to say about 25% are unemployed or underemployed. Interest rates are low, but borrowing standards are high. All homeowners have at least a net loss of equity, and many have lost their homes altogether.

This has cut a swath of destruction through the middle class economy. Family-friendly restaurants, mid-price department stores, and production home construction are among the sectors hardest hit.  Small businesses are hit hardest in any downturn because they are more vulnerable to short-term economic conditions than larger businesses, but small businesses have been hit particularly hard in this recession because their middle-class market has been hit particularly hard. Since the recession started, businesses across the middle class market have consistently said their biggest economic problem was not taxes but lack of consumer demand.

WHAT WE LEARNED FROM THE 2009 STIMULUS

The economy will respond to short-term stimulus with short-term actions.

Do you remember when George W. Bush sent everyone stimulus checks in 2008? My online bookstore had huge sales in what normally would have been a slow month. Then sales cratered below normal for the next two months. In the end, sales averaged out to normal. The stimulus checks didn’t increase my sales, it just rearranged them.

ARRA cushioned the impact of the crash and stimulated demand directly through employment projects and extending unemployment, but then it relied on small businesses to hire and keep the demand going, eventually creating an upward spiral of demand. The biggest problem with ARRA is that we knew from the outset that the bulk of the money would expire in two years. The stimulation was real, the increase in consumer demand was real, and businesses could have built on that and continued the recovery, but too many small businesses saw the increase in demand as temporary, just like my one-month sales increase.

THE AMERICAN JOBS ACT*

President Obama is criticized by the right for “throwing money at problems” and by the left for offering more tax cuts. Yet both of those things can have positive impact if done together, as ARRA proved, and both are the biggest tools the government has to attack problems. But more than that, to avoid the stall after ARRA, this act also has long-term provisions that will give recovery a better chance to take root.

Immediate Stimulation

Start with throwing money. As I explained in my Cars article, the money clog in the capital part of the economy needs to be broken up and redistributed to labor and government to balance the system. There are many places in which to insert money back into the system; ideally, you want to find the place that will have the biggest overall economic impact plus target the biggest problem, in this case lack of consumer demand.

Extending unemployment insurance is the best place to restart the economy because it turns nonconsumers into consumers.  Money that goes to the unemployed doesn’t get squirreled away in savings, it goes right back into the economy to stimulate demand where it is needed. Every dollar in unemployment benefits generates two dollars in economic activity, a big, broad economic bang for each buck spent.

Thus, “throwing money at the problem” is exactly what is called for. The Jobs Act also aims to substantially impact unemployment by:

  • Extending benefits
  • Adding hands-on help to match workers with jobs
  • Job retraining
  • Create incentives to hire the long-term unemployed
  • Create incentives to prevent layoffs (similar to what Germany does)
  • Offer incentives for the unemployed to start a business
  • Offer wage insurance so that workers with high unemployment benefits can take much lower paying jobs without being penalized

These provisions will have immediate impact, but they will also have enduring impact because they change the structure of hiring and unemployment.

It is true that tax breaks alone will not incent businesses with weak demand. However, once the demand is there and small businesses have a reason to hire, tax breaks will let them hire a little sooner than they otherwise might have. Over 60% of new jobs come from small businesses.  If even half of the millions of one-person businesses out there hired just one more person, unemployment would no longer be a problem.

The Jobs Act provides:

  • 50% payroll tax cut on first $5 million in payroll (split between employer and employee)
  • No payroll tax on raises for current employees
  • No payroll tax on new hires up to $50 million in wages

The act specifically provides that Social Security funding (which comes from payroll taxes) will not be affected. The $50 million cap is a nod to small businesses, but $50 million in wages would support over 1200 people at a $40,000 salary, so we’re still talking good-size companies.

Later Stimulation

Assuming broad demand and hiring are moving in the right direction, the next obstacle to business growth, especially for small firms, is startup and expansion capital. At one time, reinvesting in the business might have meant retooling factories, but today it more often means things like technology upgrades in small medical practices (medical knowledge has been doubling every five years), new technology in green energy industries, and office expansion to create a place for those new hires. President Obama’s plan here is to:

  • Make it easier for small firms to find government small business programs
  • Make it faster and easier to get through the qualification process and receive benefits
  • Streamline financing for businesses with $1 million or less in startup capital
  • Raise the cap on streamlined “mini offerings” (small companies going public) from $5 to $50 million
  • Let businesses to continue to accelerate expensing of their investments, an idea originally introduced in the Bush tax cuts

The next thing the act does is to look beyond broad-based economic growth and target certain industries and workers and the most urgent project needs.

Target workers: teachers, police, firefighters, first responders, veterans, long-term unemployed, youth, low-income workers.

Target projects include:

  • Infrastructure
    • Repairing and modernizing schools
    • Repairing and modernizing transportation (highway, rail, air)
    • Water and energy infrastructure
    • Other infrastructure in order of priority
    • National Infrastructure Bank that would allow the federal government to loan the cost of up to half a project and be repaid with interest after the project is operational
  • Real Estate and Construction
    • Project Rebuild: matches vacant, dilapidated property with underutilized contractors and loans money for rehabilitation
    • Land Bank to buy and hold property for Project Rebuild
    • Increasing SBA-guaranteed surety (construction) bonds from $2 million to $5 million to allow small contractors to compete for larger infrastructure projects
    • Get more homeowners into lower interest mortgages

Thus, while ARRA shored up the economy with money and some targeted incentives, the American Jobs Act focuses on improving the economy by improving its structure, especially for small businesses, along with adding money.

In both his speech and the description of the act, President Obama includes extensive “endorsements” in the form of previous statements and legislation by Democrats, Republicans, and Chamber of Commerce president Tom Donahue, all called out by name, as well as the AFL-CIO, CBO, Moody’s, business groups, and the Fed.  Will this help to get bipartisan support? It didn’t with health care reform, but of course the conservatives owned the summer narrative that year. This year we are coming off of a very different summer. Now elected Republicans have to calculate whether their “brand” can afford more tarnish on the heels of the debt ceiling debacle.  Will standing against the American Jobs Act turn out to be brandishing their sword or falling on it?

*The full text of the American Jobs Act is not available yet, so this is based on the fact sheet at www.whitehouse.gov

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Write to your Congresscritter about the American Jobs Act:  https://writerep.house.gov/writerep/welcome.shtml

This is the letter I sent to my Representative that I originally posted in comments. Feel free to use it.

Please support President Obama’s jobs bill.

Unemployment and the deficit are both serious problems, but unemployment is a bigger problem. The Republican-led House has not so much as discussed a jobs bill in the entire nine months of this Congress. In fact, you have caused a net job loss.

Not only does unemployment create a bigger drag on the economy than the deficit, but it is easier to tackle both by starting with unemployment. If you just cut spending, you cut the number of jobs, too. If you increase the number of jobs, you have a short-term cash outlay, but in the long run those new employed people will pay income tax and sales tax that the country has been without since the crash, and that extra cash inflow to the government can go toward paying down the deficit. Thus, expanding the number of jobs can also help the deficit.

President Obama put a jobs bill together for you–something the House leadership should have already done. He could have drawn on the authority of most economists who say the economy needs a big boost, but he proposed a modest boost to make it easier to get passed.

So pass the bill.

Thank you.

 

 

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