President Obama is by all accounts a terribly smart, thoughtful and hardworking person who wants to do his best for his country. But his address to Congress last night was a profoundly depressing spectacle. It suggested that the president, the most powerful man in the world, hasn’t the faintest clue how to prevent our slow-motion slide into a bona fide economic depression.
At the heart of the president’s proposed American Jobs Act is a $240 billion extension and increase in the size of the current payroll tax cut. The payroll tax impacts almost all working Americans, and it places a heavier burden on the poor than the rich. Slashing it might encourage at least some working Americans to spend more, particularly those who need the money least.
There is, however, a great deal of empirical evidence suggesting that workers save the proceeds from temporary tax breaks, particularly people who aren’t optimistic about their future economic prospects. And remember that the payroll tax pays for Social Security. Money diverted from that program has to be made up with higher taxes in the future. As America ages, those higher taxes will be imposed on fewer workers to support more retirees. The math gets dicey very quickly.
Or rather, the accounting math gets dicey. The political math is very attractive. If the Republicans fight a payroll tax cut extension, as they might, the president will skewer them for doing so.
The president called for new spending on education and infrastructure. There is an excellent case for infrastructure spending, particularly if it’s part of a long-term plan that includes finding smart ways to pay for it. But as Alice Rivlin, President Clinton’s OMB director, has said on numerous occasions, infrastructure spending is not the best way to stimulate the economy in the short-term. President Obama seemed to acknowledge that fact last year when he said, “There’s no such thing as shovel-ready projects.” Somehow amnesia has taken hold.
According to the president, the nation must choose between tax breaks for millionaires and billionaires and putting teachers back to work. Given the amount of money that is wasted in the education sector, there is little reason to believe that a new federal windfall for public schools would be spent wisely. Cash-strapped school districts have finally started to cut spending wasted on bloated administrative budgets, lighting empty classrooms and much else — money that belongs in the classroom, yet somehow never makes it there. New money for schools will undoubtedly pump up unionized public school teachers, who tend to be enthusiastic Democrats. As the president and his closest advisers understand, firing up the Democratic base is crucial to his re-election prospects.
The president reminded us that very rich Warren Buffett thinks the rich should pay higher taxes, for which the Sage of Omaha has won great praise. Yet it is important to remember that Buffett, like all investors, pays corporate income tax through the companies he owns. These taxes eat into Buffett’s vast fortune, and that’s just fine with me. But corporate taxes also eat into the wages of workers. While the Congressional Budget Office assumes that 100 percent of the burden of corporate taxes fall on the Buffetts of the world, a conservative estimate is that at least 40 percent is borne by labor.
The president did say that he wants to reform the corporate tax code, which is great news. But what kind of reform does he have in mind? Incredibly, the president used a jobs speech to make the case against “tax loopholes for oil companies.” To translate this into language we can all understand, the president is calling for increased taxes on drilling new oil and gas wells. This is despite the fact that we’ve only just unlocked vast amounts of domestic shale gas, an energy source that could reduce our dependence on oil imports and spark a jobs boom. If the central problem facing our country is that we have too many blue-collar jobs in the energy sector and that we rely too heavily on domestic energy sources, one could make a strong case for closing these tax loopholes. But if the opposite is true, as I think it is, this is a counterproductive step.
To aid homeowners in distress, the president shared his intention to help refinance mortgages at today’s low interest rates in order to give families as much as $2,000 in extra spending money. Alas, there still is no such thing as a free lunch. As Harvard economist Edward Glaeser has explained, this refinancing effort would lose investors in the mortgage market a large amount of money in the short term and it would pay dividends to homeowners over the decades-long life of a mortgage. Because many mortgage investors live in the United States and might otherwise spend that money they’d lose in the process, this measure might actually destimulate the economy in the short term.
On almost every front, the president seems to be moving the United States in the wrong direction. Never in my life have I wanted to be wrong more than I do right now.
At the heart of the president’s proposed American Jobs Act is a $240 billion extension and increase in the size of the current payroll tax cut. The payroll tax impacts almost all working Americans, and it places a heavier burden on the poor than the rich. Slashing it might encourage at least some working Americans to spend more, particularly those who need the money least.
There is, however, a great deal of empirical evidence suggesting that workers save the proceeds from temporary tax breaks, particularly people who aren’t optimistic about their future economic prospects. And remember that the payroll tax pays for Social Security. Money diverted from that program has to be made up with higher taxes in the future. As America ages, those higher taxes will be imposed on fewer workers to support more retirees. The math gets dicey very quickly.
Or rather, the accounting math gets dicey. The political math is very attractive. If the Republicans fight a payroll tax cut extension, as they might, the president will skewer them for doing so.
The president called for new spending on education and infrastructure. There is an excellent case for infrastructure spending, particularly if it’s part of a long-term plan that includes finding smart ways to pay for it. But as Alice Rivlin, President Clinton’s OMB director, has said on numerous occasions, infrastructure spending is not the best way to stimulate the economy in the short-term. President Obama seemed to acknowledge that fact last year when he said, “There’s no such thing as shovel-ready projects.” Somehow amnesia has taken hold.
According to the president, the nation must choose between tax breaks for millionaires and billionaires and putting teachers back to work. Given the amount of money that is wasted in the education sector, there is little reason to believe that a new federal windfall for public schools would be spent wisely. Cash-strapped school districts have finally started to cut spending wasted on bloated administrative budgets, lighting empty classrooms and much else — money that belongs in the classroom, yet somehow never makes it there. New money for schools will undoubtedly pump up unionized public school teachers, who tend to be enthusiastic Democrats. As the president and his closest advisers understand, firing up the Democratic base is crucial to his re-election prospects.
The president reminded us that very rich Warren Buffett thinks the rich should pay higher taxes, for which the Sage of Omaha has won great praise. Yet it is important to remember that Buffett, like all investors, pays corporate income tax through the companies he owns. These taxes eat into Buffett’s vast fortune, and that’s just fine with me. But corporate taxes also eat into the wages of workers. While the Congressional Budget Office assumes that 100 percent of the burden of corporate taxes fall on the Buffetts of the world, a conservative estimate is that at least 40 percent is borne by labor.
The president did say that he wants to reform the corporate tax code, which is great news. But what kind of reform does he have in mind? Incredibly, the president used a jobs speech to make the case against “tax loopholes for oil companies.” To translate this into language we can all understand, the president is calling for increased taxes on drilling new oil and gas wells. This is despite the fact that we’ve only just unlocked vast amounts of domestic shale gas, an energy source that could reduce our dependence on oil imports and spark a jobs boom. If the central problem facing our country is that we have too many blue-collar jobs in the energy sector and that we rely too heavily on domestic energy sources, one could make a strong case for closing these tax loopholes. But if the opposite is true, as I think it is, this is a counterproductive step.
To aid homeowners in distress, the president shared his intention to help refinance mortgages at today’s low interest rates in order to give families as much as $2,000 in extra spending money. Alas, there still is no such thing as a free lunch. As Harvard economist Edward Glaeser has explained, this refinancing effort would lose investors in the mortgage market a large amount of money in the short term and it would pay dividends to homeowners over the decades-long life of a mortgage. Because many mortgage investors live in the United States and might otherwise spend that money they’d lose in the process, this measure might actually destimulate the economy in the short term.
On almost every front, the president seems to be moving the United States in the wrong direction. Never in my life have I wanted to be wrong more than I do right now.
