Assessing the President's Plan

I spent some time reading through the text of President Obama’s jobs speech delivered Thursday evening and summarized the specific proposals in it. First is a group of short term ideas that are in the American Jobs Act to be delivered to Congress this week for passage “right away.” Second is a group of longer term proposals to include tax reform and entitlement reform to be included in a bill that will be delivered to Congress later in the fall.

Shorter Term Ideas in American Jobs Act for Immediate Approval by Congress
1. Tax break for companies who hire new workers or give raises
2. Cut payroll taxes in half for every working American
3. All businesses continue immediate write-off of 2012 investments
4. Government will begin spending to

• Repair and modernize 35,000 schools
• Rehab homes in areas hit hardest by foreclosures
• Jump start thousands of transportation projects
• Put thousands of teachers back to work
• Give tax credits to companies that hire veterans
• Provide hundreds of thousands of summer jobs in 2012
• Give $4,000 tax credit to any company hiring someone looking for a job for more than six months
• Extend unemployment insurance for another year
• Delay expiration of “Bush Tax Cuts” for “typical working families”

All the above are to be paid for by raising the Debt Commission target from $1.5T to ~$2.0T.

Longer Term Proposal to Come Later to Stabilize Debt in the Long Run
1. Modest adjustments to “programs like” Medicare and Medicaid
2. Reforms to tax code so wealthiest Americans and biggest corporations pay “their fair share”
3. Eliminate “pages of loopholes and deductions”
4. Lower one of the highest corporate tax rates in the world
5. Pay small business owners who do business with the government faster
6. Cut red tape that prevents start-ups from raising capital and going public
7. Help more people refinance their mortgages
8. Clear the way for trade agreements with Panama, Columbia, and South Korea
9. Help workers whose jobs have been affected by global competition
10. Look for more ways to work side-by-side with America’s businesses

I don’t know what kind of diagnostic journey the president and his staff took to arrive at this prescription, but I believe that the big problem, which seems pretty obvious on the chart below, is lack of recovery of private investment. Consumer spending, government spending, and net exports are all well ahead of where they were in 2006 before the crash. But private investment is down 18.9%, and it is that private investment that feeds future GDP growth. If private investment were up 20% in line with other increases instead of down 18.9%, it would be about $900B higher than it is and the economy would be roaring and planting seeds for the next bubble and crash.  (Click on the chart for a high resolution view.)

The dotted/dashed lines on the chart include government transfer payments which are not a part of GDP. They represent money taken from one part of the economy, where it can no longer be spent or invested, and injected into another part for spending or investment there. Such transfer payments are up 50% since early 2006 resulting in a 17% increase in the size of government. That is bad news in my opinion.  (Click on the table for a readable view.)

So, here is where I come out on the president’s proposals. The short term stuff will give short term relief to some and grief to others while growing government more and doing nothing to address the fundamental problems holding back private investment growth. But, it’s not a big deal and Congress should pass it “right away” as the president requested and move immediately to entitlement and tax reforms that will address fundamental problems, re-invigorate private investment, and improve the long term outlook for the economy if done well.

As far as the long term proposals go, fine if essentially all the loopholes and deductions are eliminated and the corporate tax rate comes down to one of the lowest in the world and stops encouraging companies to invest their overseas earnings there instead of here. And fine if Social Security is one of the programs “like” Medicare and Medicaid needing reform but the president was just afraid to mention it. And fine, if we can reach agreement on what that “fair share” for the wealthy is and also reduce the total share of government in our economy back down to around 30% or so. But I don’t like that idea of government working side-by-side with American business. I think Jeff Immelt should get out of the White House and go back to Fairfield, CT and get to work.

And no, I don’t know how paying bills on time and refinancing mortgages got in the long term plan.

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Note Added Sept 13:  So now we learn the president wants to phase out income tax deductions beginning at earnings of $200,000 a year.  Congress should not, and I hope will not, consider that without a major decrease in the marginal tax rates.  See my post Boosting Buffett's Bill.