President Obama’s plainspoken speech on jobs was delivered to Congress on September 8 in what for him was an almost impossible setting. Public trust of government is in tatters and many people believe that elected officials ignore them. Ever since the TARP bailouts of financial institutions and the large bonuses paid to executives of failed companies, we have entered an almost surreal atmosphere reminiscent of the aftermath of the European financial crisis of 1931. Many citizens are so disheartened that they do not believe government has the capacity to be responsive to their needs. Although our transportation systems, schools, and other infrastructure are in a sad state, these citizens have no faith that their tax dollars will be used to repair them. In short, while America is rapidly deteriorating, there is a widespread fear that Washington, D.C., is indifferent to its plight.
Many Americans see government as an insurance agency for rich and powerful people and corporations, who deploy lobbying dollars and campaign contributions to take care of their interests but not those of others. Faced with the choice of having their tax dollars spent for the benefit of elites or demanding that taxes be radically reduced, they see cutting taxes as the only rational course of action. Our nation appears to be caught in a downward spiral where lack of trust leads to dysfunction and disappointment, which, in turn, reinforce distrust and set our society on an ever lower trajectory.
The current frenzy for austerity in Washington, D.C., and Europe reinforces and reflects this despondency.1 When one in six Americans is unemployed, underemployed, or so discouraged that they are no longer seeking employment, the country is in a profound social crisis. In response, elected officials from both parties have engaged in rituals of deficit reduction. At a time when our borrowing costs are at historic lows and there are plenty of unemployed workers and resources in the construction sector, a “congressional super committee” is being formed in Washington to cut social programs so we can continue to afford the costs of wars, future bailouts, and tax cuts for the richest one percent of the country.
That committee’s responsibilities do not include formulating a broad-based investment program for the American economy, including its crumbling infrastructure, for the years to come. Nor is it charged, as it should be, with cutting long-term contingent liabilities.2 For example, strengthening financial regulation and supervision to prevent future bailouts and their side effects would be a major potential savings. The committee should also be charged with bringing down US health care costs to levels comparable with other developed nations. US health care costs are double the average of the OECD countries. Reductions could be largely accomplished by introducing more competition in the market for medical insurance and by requiring that lower drug prices be negotiated for government health programs.
Finally, the committee should be considering the effects on the budget of our huge military commitments. Such needed cuts would reassure markets that there is capacity to increase near-term deficit spending in order to help the country emerge from its current prolonged slump.
At times, the rhetoric used in Washington, particularly from some in the Republican Party, suggests that dismantling the government is a goal worth pursuing even at the cost of driving the economy into a depression. This creates the impression that a cleansing ritual is being enacted, which seems a particularly disheartening consequence of the mistrust created in the aftermath of TARP.
Not all our problems are of our own making, though the financial reforms undertaken after the 2008 crisis were already inadequate. Our unwieldy and ungovernable financial system shudders at the statements of European financial officials because investors know the world’s banks are intimately intertwined. Because the very real fiscal problems in Greece cannot be quarantined, a nation about the size of Nevada has terrified investors throughout the world who fear the freeze-up of the world’s system for allocating credit—the kind of fear that spread after the collapse of Lehman Brothers in 2008. This is a time when one would think that responsible US officials, mindful of the dangers emanating from Europe, would be inclined to fortify our economy, shoring up employment rather than weakening it through cutbacks that make it more vulnerable to a new shock.
These were some of the circumstances surrounding President Obama’s speech on the need to create jobs. What does the speech portend for the economy and for politics in 2012?
The speech itself was artful, passionate, and astute. President Obama acknowledged the current distrust of government very openly. Challenging Congress to do something that addressed job creation, he presented an economic vision to the American people that reflected an important role for government in reducing our 9 percent unemployment rate, while maintaining that this was not a plan to add to runaway debt. He declared his intention to ask the congressional super committee, created as part of the debt ceiling legislation in July, to reduce the deficit in future years by the same $447 billion that the President’s job legislation would require.
Obama went on to illustrate the choices before the country with unusual force and candor. He asked whether we would rather have tax loopholes for oil companies or give tax credits to small business owners for hiring new employees. He urged Congress to support the rebuilding of schools because our children do not deserve to be forced to learn in buildings that are falling apart. His proposal to refinance underwater mortgages at 4 percent interest rates, if done on a very broad scale, could also help the larger economy and is long overdue. For the first time in a long while, Obama seemed to say, “I stand for this, and I challenge you to disagree with me.” He declared, as he has rarely done, that some groups, like the oil companies, are his adversaries in this urgent crisis. He also said that he would go to every corner of the country to argue for his priorities and his vision. The speech was evidently the beginning of his national presidential campaign.
As for the plan he put forward, it is generally a good departure from his previous positions, but it is still insufficient. It relies too much on tax cuts, which, per dollar of increase in the budget deficit, have much less impact on the economy in the short term than spending programs. For example, Obama said that “all small business owners will see…their payroll taxes cut in half next year”—a plan supported by “fifty House Republicans.” His critics will emphasize that such a proposal has the smell of preemptive compromise that has been his unfortunate trademark. In particular, his Democratic base has a right to be upset that he is offering to cut “entitlements”—a misnomer for programs whose benefits are earned by previous paid-in contributions—including Medicare and Medicaid, in order to pay for a program that is very reliant upon tax cuts. That sounds like Republican music.
Much of the Obama program merely preserves or extends stimulus measures already enacted. For example, the proposal to extend the cut in the payroll tax is a renewal of the cut enacted after the midterm election in 2010, which is scheduled to expire at the end of 2011. So rather than providing $447 billion of new spending to encourage growth, a significant portion of the plan can be seen as an effort to offset the negative economic effects of past stimulus programs expiring.
Following the speech, some industrial executives said cuts in the payroll tax wouldn’t help create new jobs. But reliable analysts such as Moody’s Analytics estimate that the plan would, by Election Day, cut the unemployment rate by one percentage point and that it would raise GDP growth by at most two percentage points in 2012.3 When those estimates are integrated with models of political business cycles, such as those of Ray Fair at Yale University, the results suggest that Obama’s share of the popular vote could be boosted by 1.34 percent, making the difference between winning and losing.4
Most disappointing is that Obama’s new measures are designed to be in force for only one year. In current circumstances, we need a large-scale, multiyear plan that allows people to see a better future for themselves. True, the President did say that this was the first proposal and not the last. But his jobs plan does not show a way forward that is commensurate with the urgency of “our generation’s Sputnik moment”—as he described it in his State of the Union address. Although it is bolder than many of his supporters expected, the danger is that it is both too brief in duration and too small. The Economic Policy Institute estimates that passage of the American Jobs Act could add as many as four million jobs.5 But it is a one-year program. Any backsliding after the election, when more than 11 million people would still be out of work, could set the stage for renewed fear and disappointment. The plan risks replaying the inadequacy of the 2009 stimulus and the public criticisms of it and may therefore increase the widespread cynicism that government does not work.
What will be the political impact of the jobs plan? Will it become law? And if it is blocked by the Republican Congress, will Obama be capable of making that refusal a major campaign issue? My sense is that the recent rise in public disapproval of government, coupled with the number of Republicans and Democrats in the House who are up for reelection at the same time as Obama, makes it a pretty good bet that something will be enacted. But working against the plan is the belief of Republican senators that they stand a good chance of achieving a Senate majority, or something close to one, in the coming elections. The Republicans in the Senate may well resist anything that helps incumbents, since Republicans hold only ten of thirty-three seats up for election in 2012. In all likelihood, Congress will pass a reduced version of Obama’s plan as Republicans try to insulate themselves from the criticism that they are indifferent to the plight of the electorate. If that is the case, the test for Obama will be whether he can expose Republican tactics for what they are.
President Obama, like all elected officials, has to deal with the two currencies of electoral politics: money and votes. He plans to raise $1 billion, and much of it will have to come from the small part of the electorate in which prosperous members of the corporate world are prominent. There is an obvious difficulty for Obama in getting the well-to-do to support spending on health and education systems to strengthen an American workforce on which many of them do not depend for their livelihood. Globalization, in which foreign workers often displace American corporate employees, and technological innovation, which can also, in some situations, reduce the number of American employees, both have a strong influence on politics. The top 10 percent of income earners have gotten more than 100 percent of the income gains over the last thirty years—a percentage only made possible when the bottom 90 percent of income earners lose ground. The top 1 percent, moreover, has gotten two thirds of those gains.
2 See Thomas Ferguson and Robert Johnson, "A World Upside Down? Deficit Fantasies in the Great Recession," Roosevelt Institute Working Paper No. 7, November 2010, at www.newdeal20.org/wp-content/uploads/2010/12/a-world-upside-down. ↩
3 Mark Zandi of Moody's Analytics, "An Analysis of the Obama Jobs Plan," September 9, 2011, available at jaredbernsteinblog.com/wp-content/uploads/2011/09/An-Analysis-of-the-Obama-Jobs-Plan.pdf. ↩
See Thomas Ferguson and Robert Johnson, "A World Upside Down? Deficit Fantasies in the Great Recession," Roosevelt Institute Working Paper No. 7, November 2010, at www.newdeal20.org/wp-content/uploads/2010/12/a-world-upside-down. ↩
Mark Zandi of Moody's Analytics, "An Analysis of the Obama Jobs Plan," September 9, 2011, available at jaredbernsteinblog.com/wp-content/uploads/2011/09/An-Analysis-of-the-Obama-Jobs-Plan.pdf. ↩