James Pethokoukis

Politics and policy from inside Washington

Obama’s $447 billion reelection plan

Sep 9, 2011 15:16 UTC

There’s been much speculation that President Barack Obama will spend $1 billion to get reelected. Turns out those guesses were off by $446 billion.

What Americans heard last night was a $447 billion political plan, not an economic one. It’s purpose was to a) fire up the demoralized Democratic base and b) show independents that Obama is trying to do something – anything – to reduce unemployment, not just slash needed “investment” like those heartless, pro-austerity Republicans.

Now all the usual suspects will claim the American Jobs Act will create more growth and more jobs through $250 billion in temporary payroll tax cuts and $200 billion in infrastructure spending, unemployment benefits and aid to state and local government.

Take Moody’s economist Mark Zandi, a favorite of the White House and congressional Democrats. Zandi’s research says the original $800 billion Obama stimulus created or saved some 2-3 million jobs. And he likes Stimulus 2.0 just as much. He claims it would “add two percentage points to GDP growth next year, add 1.9 million jobs, and cut the unemployment rate by a percentage point.”

Really? Seriously?

1) Of course, such analysis is based on garbage in, garbage out, Keynesian economic models. The results were already baked into the cake.  Better to see what actually happened as gleaned from government statistics. In a recent paper, Stanford University economist John Taylor simply looked at whether, as a result of the 2009 American Recovery and Reinvestment Act, consumers actually consumed and whether government actually spent in a way that produced real growth and jobs. Turns out, they didn’t:

Individuals and families largely saved the transfers and tax rebates. The federal government increased purchases, but by only an immaterial amount. State and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases toward transfers. Some argue that the economy would have been worse off without these stimulus packages, but the results do not support that view.

2) Economists from George Mason University also looked at the real-world results of  the ARRA by surveying employers. Their findings:

Hiring isn’t the same as net job creation. In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations after January 31, 2009, were unemployed at the time they were hired. More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%). Thus, there was an almost even split between “job creating” and “job switching.” This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy: even in a weak economy, organizations hired the employed about as often as the unemployed.

3) And let’s not forget what Milton Friedman might have to say about this sort of deal, which gets to the heart of why Keynesian stimulus doesn’t work (via Wikipedia):

The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations. The key conclusion of this theory is that transitory, short-term changes in income have little effect on consumer spending behavior.

Team Obama thinks the whole package could boost growth by two percentage points. But the  infrastructure spending and unemployment benefits will be a tougher sell. Republicans may well substitute their own stimulus ideas for those items so that the package ends up composed entirely of tax cuts.

The most likely addition is a temporary reduction in the taxes on foreign earnings brought back to the U.S. by its multinational corporations. The U.S. Chamber of Commerce estimates such a tax holiday could boost growth by a full percentage point next year. White House economists criticize idea as providing too little bang for the buck, but it could be the price for getting a deal. But an agreement can get probably get done, which would enhance perception of Obama as a leader and boost his approval ratings. Just don’t expect it to do much for America’s sputtering economic recovery.

COMMENT

James, didn’t your mama teach you “if it sounds too good to be true it probably is”–like the previous post–had your removed your “liberal magical spectacles” to take a closer look at this fraud you would have seen him for what he is–a complete non starter. Come to the dark side James and see the light.

Posted by flopper99 | Report as abusive

Dr. Obama prescribes another big dose of stimulus

Sep 9, 2011 07:36 UTC

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By James Pethokoukis

WASHINGTON (Reuters Breakingviews) – U.S. President Barack Obama’s $447 billion jobs plan should please everyone from Federal Reserve Chairman Ben Bernanke to the International Monetary Fund’s boss Christine Lagarde. Both policymakers have suggested America put stimulus ahead of austerity. Congressional Republicans may be less thrilled. But the tax cuts may pass Congress. Expect Wall Street to start boosting 2012 U.S. growth forecasts.

All summer, bank economists have been slashing their GDP estimates for next year. Yet at the same time many have continued to assume that more than $100 billion in temporary payroll tax cuts for workers would be extended through 2012. The new White House proposal raises that total to $175 billion and also tacks on a $65 billion payroll tax reduction for employers. Those two elements make up the bulk of Obama’s “American Jobs Act” and are the bits mostly likely to earn GOP support on Capitol Hill.

The president’s models calculate the whole package could boost growth by two percentage points. Some $200 billion in infrastructure spending and unemployment benefits will be a tougher sell. Republicans may well substitute their own stimulus ideas for those items so that the package ends up composed entirely of tax cuts.

The most likely addition is a temporary reduction in the taxes on foreign earnings repatriated by multinational corporations. The U.S. Chamber of Commerce estimates such a tax holiday could boost growth by a full percentage point next year. White House economists criticize the idea as providing too little bang for the buck, but it could be the price for getting a deal. Either way, an agreement can get done.

Then it will up to the new debt reduction “supercommittee” in Congress to figure out a way of paying for a year of stimulus over the next decade. The panel was already going to have a tough time finding $1.2 trillion in deficit cuts, its current mandate. Obama would increase the bipartisan group’s burden by more than a third.

But with borrowing costs for Uncle Sam incredibly low, markets seem unconcerned about federal debt levels. And with re-election perhaps riding on getting the plan passed, Obama probably isn’t too worried either.

CONTEXT NEWS

— U.S. President Barack Obama challenged Congress on Sept. 8 to enact a $447 billion package of tax cuts and new spending to revive a stalled job market. But he faces an uphill fight with Congressional Republicans on any new spending.

— Obama, who pushed through an $800 billion economic stimulus package in 2009, said his new plan would cut taxes for workers and businesses and put more construction workers and teachers on the job through infrastructure projects.

— As fears rise of another recession and more global economic gloom, G7 finance ministers meeting in France on Friday are set to encourage countries that can afford it to do more for growth.

— Obama said his proposed plan would “provide a jolt to an economy that has stalled and give companies confidence that if they invest and hire there will be customers.”

— He proposed extending unemployment insurance at a cost of $49 billion, modernizing schools for $30 billion and investing in transportation infrastructure projects for $50 billion.

— But the bulk of his proposal was made up of $240 billion in tax relief by cutting payroll taxes for employees in half next year and trimming employer payroll taxes as well.

— Obama also said he was seeking to broaden U.S. homeowners’ access to mortgage refinancing to help the ailing housing market — a proposal that drew rare applause from Republicans during the speech.

(Editing by Rob Cox and David Evans)

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