Public Comment

Obama's Proposal: Mainly Smoke and Mirrors

By Harry Brill
Monday September 12, 2011 - 11:22:00 AM

There are some excellent recommendations in President Obama's speech on the economy. He proposed a one year extension on unemployment insurance, closing business tax loopholes, and raising taxes on the rich. He was as right as right can be to complain that the billionaire Warren Buffet paid less on federal taxes than his secretary. 

But the major thrust of his $ 447 billion dollar program for the economy is full of potholes. Wholly aside from the merits and demerits of his recommendations, the amount of money being proposed is paltry. It is only 56 percent of the 2009 stimulus program legislated in 2009. You might recall that the Obama administration then had expected unemployment to fall to 8.2 percent. But it has never since dipped below 9 percent. Since the economy is now rapidly moving toward a double dip recession, there is no reason to expect very good results with not much more than half being recommended. 

When we carefully look at both the specifics of the program and the fiscal policies of the federal government, the prognosis for the economy is gloomy. Instead of increasing spending on public programs, massive reductions in public spending are being planned instead. Congress with Obama's blessing has already agreed to shave $1 trillion from federal spending over the next ten years, and it has also agreed to reduce the federal budget by an additional $1.5 trillion Obama advised that additional cuts be made to offset the costs of his package. States and local communities are also making horrendous cuts. Look at what has occurred so far. Since June 2009, which is the month in which establishment economists claimed that the recession was over, the federal, state, and local governments have discarded almost 600,000 jobs. Since the cutbacks at all levels of government far exceed the aggregate spending for what Obama calls The American Jobs Act, the economic crisis will certainly deepen. 

Taking a brief look at the American Jobs Act, we learn that tax cuts and credits would make up over 50 percent of the allocations, but their impact on creating jobs would at best be marginal or none at all. For example, extending special deductions for business equipment and machinery is a tax giveaway to business and not a means to create jobs. Nor would tax credits to encourage hiring long term unemployed create jobs. As the New York Times reported (9/10/11), employers themselves do not believe that any particular tax break would provide an incentive to hire. Rather, they tend to hire more workers when the economy is improving and there is business demand. As past experience has clearly demonstrated, employers will be receiving substantial tax credits for hiring even though their business required that they hire new employees anyhow. In short, another giveaway. 

Particularly alarming is the substantial cuts in social security payroll taxes for both employees and employers. The assumption is that this will stimulate increased spending, which in turn will increase jobs. Although these cuts will produce some positive impact, it would be a small one. Part of the increase in disposable income will serve to retire personal debts. Also, with our economy on the brink consumers are increasingly cautious about spending.  

Nor should we ignore the risk that the Obama administration is imposing on the social security trust fund. We know from experience that temporary tax reductions are often permanent ones. In fact, we have known for a long while that with the extension of the horrendous Bush tax cuts, the powers that be would feel compelled to go after both Social Security and Medicare to make up for some of the shortfall. Depriving social security of $240 billion, which will probably continue yearly, cannot be beneficial to working people. 

Although the infrastructure and employment projects are certainly welcome, allocating less than $200 billion will barely make a dent on providing full time jobs, particularly since Obama assured congress that cuts will be made elsewhere to pay for the American Jobs Act. The federal government would have to reverse course by not only spending appreciably more. It is critical is how that money is spent. As more and more jobs are being outsourced to foreign countries, and as business is committed to doing all it can to reduce labor costs, we economy will not be rescued by the business community. Nothing less than a massive WPA style approach in which the public sector is the employer would work. Any other alternative will yield only massive unemployment and massive poverty.