A Second Stimulus Package? Becker

The recovery from the Great Recession has been slow and unsteady. Two years after unemployment peaked at 10.1%, it still remains over 9%, in contrast to the under 5% in 2007. GDP has grown very slowly during the past year, and is now more than 10% below its potential level. President Obama is rightly concerned about the large number of Americans who are unemployed, especially the longer term unemployed-those who have been without jobs for over six months. How successful will his proposed American Jobs Act be in getting the economy moving forward at a much faster clip?

Boiled down to its essentials, the proposed Jobs Act is a second stimulus package since most of the spending is supposed to take place soon (before the end of 2012), while it will be financed over the next ten years in ways that are unclear.  At an estimated approximately $450 billion, this package is much smaller than the first stimulus package in 2009 that cost about $800 billion. The proposed structure is better than the first one since it relies more on tax cuts and direct subsidies to households: about 2/3 of the proposed spending comes from a temporary cut in (payroll) taxes and increases in benefits to the long term unemployed.

I am less negative on the extension of unemployment benefits than is Posner. I agree it will encourage some of the longer term unemployed to stop searching for jobs since they could then receive these extended benefits. On the other hand, an extension helps insure workers against long-term unemployment, which is the most difficult form of unemployment to finance out of own savings and borrowing. In an economy with a very slow recovery, extending unemployment benefits tailored to long-term unemployment may be sensible, although it is not an easy call.

The cut in payroll taxes is supposed to have two positive effects on the economy. It would temporarily reduce the cost of labor to companies and thereby encourage them to hire more workers, and it would increase the spending of workers through increasing their take home pay. Such temporary cuts in wage costs to employers will increase employment only a little, and it will be mainly for low skilled low wage jobs that can be easily eliminated after the cuts expire. Since spending by households responds much more to their long term income prospects than to short run changes in their incomes, households would tend to save rather than spend most of their higher incomes due to a temporary cut in social security taxes. Therefore, the employment bang for the buck will be small per dollar of tax cut.

Further lowering, and possibly reversing the sign, of any positive stimulus to the economy from a temporary tax cut and extension of unemployment benefits is that they must eventually be paid for: either through future higher taxes, lower government spending, or greater inflation (the inflation “tax” in the language of economists). These effects may not be fully anticipated, but surely businessmen and households who are making long-term investments will pay attention to future taxes and future government spending as well as to their present levels.

Most of the remainder of the president’s jobs plan is the $90 billion that will help finance infrastructure projects. While many infrastructure projects in the US might well have high benefit/cost ratios, it is doubtful whether these will be the projects selected by the political process. The president was well aware of this in his speech when he said he wanted “no more bridges to nowhere”, but I see no reason why this time will be different than much of America’s recent history on federal-supported infrastructure projects.

This recovery has been so slow in good part because small and large businesses are reluctant to hire workers for the long term and to invest in durable physical capital since they are concerned over the uncertainty and level of the long-term taxing, regulatory, and fiscal situation of the United States. The president partly addressed these concerns by calling for passage of the stalled free trade acts with Panama, Colombia, and South Korea, supporting patent reform, and advocating lower taxes on corporations. At the same time, however, he also raised concerns about the future economic environment by his proposed sizable increase in federal spending that would further weaken the fiscal position of the federal government.

The net effect on the short and long term health of the economy will depend on whether Congress supports those aspects that will improve the environment faced by households and businesses rather than the more prominent proposals that are likely to further weaken the economy.

Comments

[Jack]

NEH.... Aaah Yes! Sturmey made my first set of gears on which I must have ridden several thousand miles.

I was thinking of them recently when in REI I spotted a SEVEN speed bike with the all in a S-A type hub!

Poor Schwinn, another example of apparently fat dumb and happy Americans -- a family not a corpie in this case, snoozing far too long. WELDED 42 pound Varsities with a heavy steel Ashtabula crank???

"Funny thing" a few years earlier they were ON it with the black and chrome Phantom, and later the Stingrays with "banana seats" in metal flake colors. When "10 speeds" took off they HAD the excellent Paramount that is a rare collector item today, but blew it on 10 speeds for real people...... and blew it again when "mountain bikes" came along.

Also "funny" is their having been involved in restraint of trade suits for many years.

The Brits? With the headstart of Raleigh, quite a nice frame and bike at the time, I don't think they ever built a derailleur and had to use the mediocre, at best, Huret from France. France was a little ahead in using new tough plastic in it's Simplex derailleurs that were on most of the Peugeuots. sp

One more "funny thing? Perhaps as with cars, Italy made the most beautiful racing and "art" bikes with the Colnago's Masi's, Cinelli's with Campagnolo gears et al but could NOT make a price competitive sport bike.

Japan ate all their lunches .......... and high teas on bikes, motorcycles, sport and production luxury cars. A lesson for America?

[Jack]

Well, Retta..... yeah, IF Americans ARE a highly productive people and MOST of us have a chance to go to our individual jobs fairly regularly, AND the fruits of our labors are NOT skimmed off and wasted by the top few percent and our WS thieves, we SHOULD, if we act wisely on energy et al, continue to enjoy a high std of living regardless of what happens beyond our borders.

But! even a ten cylinder engine will not run smoothly or produce its expected power if one cylinder doesn't fire, and! if one adds too much steel and luxurious appointments to it, we NOT be surprised to see it's once powerful engine not pulling the freight.

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[an observer]

Dugger:

September 12, 2011
August’s selloff was the first tremor of the coming fiscal earthquake
 Slowdown risk was partly responsible for August’s market downturn but fiscal adjustment cost
discounting is the reason for the outsized selloff. Shocked into deeper awareness, asset managers
started asking how companies might be hurt by spending cuts and tax increases needed to achieve
fiscal sustainability. They realized three things and started selling --
1. Big-time fiscal stimulus is a thing of the past. Loss of fiscal stimulus is one of the costs smart
investors began to factor into their valuations of company debt and equity.
2. Companies will be hit directly by austerity driven spending cuts and tax increases and so will
their customers. These fiscal adjustment costs need to be included in company valuations.
3. Most investors haven’t caught on yet. If large positions need to be scaled back or protected
by derivative hedges, this needs to be done now before fiscal adjustment cost discounting
becomes widespread.
 The Budget Control Act (BCA) did not represent any real progress in solving the underlying drivers of
public debt, and it allows Congress to kick the tough decisions even further down the road, increasing
crisis risk and the ultimate amount of fiscal austerity. Furthermore, the fall calendar is too packed
with deadlines and the partisan environment too polarized for any meaningful progress on a job
creation agenda.
 Growth assumptions in budget projections are too optimistic. Below forecast growth means the deficit
will grow faster than forecast, and the U.S. government may hit the debt ceiling again before the
November 6, 2012 election.

[NEH]

Observer, And so the solution is? Gold, Diamonds, cash in the pillow case or shoe box in the closet? Or mason jar in the back yard?
I don't think the Financial Industry is in quite these dire straits... Beware of any and all analysis pointing to "Gloom & Doom" or a drop into the Abyss. There are many out there who are driven by their own Agendas. Some of which are vested heavily in the Negative Derivatives Market. It's all about Advertising and Marketing. Fact and truth has nothing to do with it...

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[Jim Neal]

"This recovery has been so slow in good part because small and large businesses are reluctant to hire workers for the long term and to invest in durable physical capital since they are concerned over the UNCERTAINTY and level of the long-term taxing, regulatory, and fiscal situation of the United States."

Would someone please explain to me how one quantifies the oft-repeated references to businesses being concerned over "uncertainty." That's a rather vague assertion.

[George]

"This recovery has been so slow in good part because small and large businesses are reluctant to hire workers for the long term and to invest in durable physical capital since they are concerned over the uncertainty and level of the long-term taxing, regulatory, and fiscal situation of the United States."

I am sorry you don't think businesses can handle political uncertainty. That is a problem in a country that has national elections every two years.

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As for the Infrastructure problems confronting this Nation, this is due to an old, old Budgetary procedure known as "Robbing Peter to pay Paul". Essentially, you forgo Maintenance and Repairs on Capital and Infrastructure for period. This then gives you extra finances to use as you so desire. This is a short term, not long term budgetary fix. If it is tried in the longterm, Capital and Infrastructure reach a critical state where Maintenance and Repairs must be made or the Capital and Infrastructure fails, sometimes catastrophically, and becomes scrap. Dragging the Nation or Industry down Economically. This is where we are at today. Nationally, at the State and County level and Locally. We have been robbing Peter to pay Paul far too long and it is now time to ante up.

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