The Jobs Plan. Will it work?

Last night the President outlined proposals for job creation that have historically gained bipartisan support. In this era of polarization, however, a history of bipartisan support does not suggest more of the same. Today the politicking will resume.

And while we expect rigorous debate on the merits of any plan, there is a difference between politics and governance. In politics, you can get away with slinging ideas and theories (especially ideas presented as “facts”). But governing involves the application of these notions, and evaluating them requires walking through the likely impacts to weigh their relative merits. An idea is only as good as it’s application. Right now, economic plans need to be vetted specifically for how they will affect the economy and jobs in the short term in order to gauge their value.

Today, economic growth is the #1 priority, and creating jobs is the holy grail. There are competing theories on how best to do this. The President is proposing a plan emphasizing construction jobs and investments in infrastructure. This approach involves putting people to work so they can spend their wages buying goods and services. The economic benefit hinges on a multiplier effect which circulates money through the economy. This happens when workers spend their paychecks on groceries, haircuts, clothes, or going to the movies. The people they buy from are also getting paid. They, in turn, will spend their income on dining out, school supplies, home improvements, etc.. The effectiveness of this approach hinges on the notion that putting more people to work will enable them to consume. And since consumption is 70% of the economy, it would need to be a broad effort. Walking through the application of this proposal, putting cash into workers pockets is a mixed bag. Many people are not spending, but paying down debt and saving more. But unemployed people getting back to work are a different matter – they do spend more. And with 35% unemployment in the construction industry the benefits of a multiplier effect are real. To the extent we put people back to work, the odds of realizing real benefits are very high. But its not a half measure, the scope of the investment needs to be very broad.

The alternative theory is that cutting taxes (without increasing the deficit means cutting government) will put more capital to work in the private sector. Less government will remove the constraints on job growth. This theory holds great appeal. It attempts to link lower taxes to a stronger economy in a general fashion. As far as job creation  specifically, it relies on the notion that companies paying lower taxes will use those savings to hire more workers. Again, to evaluate the theory we need to walk through its ramifications.

In recent years, cutting corporate taxes has not resulted job growth domestically. Indeed, tax rate and profitability can be correlated, but correlation between tax rates and domestic employment is harder to demonstrate. Today, companies are (wisely) sitting on their profits until increased demand for their goods and services justifies hiring. And when they do hire its not always in the United States. Cutting taxes in general has not created jobs. Entities who (can afford to) pay taxes do benefit, but those lower on the socioeconomic ladder do not. In practical terms, those realizing savings from lower taxes are stashing away the excess and depriving the economy from the benefits of a multiplier effect, and increasing the wealth gap. Further, if lower tax rates equated to a robust economy, our economy would be roaring right now. Taxes are at their lowest rates since the 1950s and we are mired in recession. Countries like Germany and Denmank, on the other hand, have much higher taxes are comparitively strong. While cutting taxes has boosted to the economy in the past, it is not working now – despite the popularity of the message.

One other conflict is that cutting government is cutting jobs. Measurable reduction of government does not come from “reducing waste and inefficiency” but from cutting budgets, departments – and jobs. And, if creating jobs in the near term is crucial to economic growth, someone needs to explain how cutting jobs creates them. This issue is largely absent from the public discussion, but on it’s face is nonsensical. In the long term, we need balanced budgets and smaller deficits. This goes without question as the current trend of overspending is not sustainable. Cutting government to fix the economy holds ‘grand gesture’ appeal – one simple act and the economy will be healed – but has been remarkably ineffective of late.

In governance, an idea is only as good as it’s application. And walking through these approaches suggests pumping money into the economy through direct job creation leads to economic benefit in the short term. At the same time, general cuts in taxes and government do not create clear benefits immediately and will likely harm a recovery. In the short term, job creation trumps debt. And while the recipe for long term success lies in reducing deficits, they will be easier to address if we strenghten the economy through job creation first.

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