Analysis: Obama’s budget seeks to boost jobs & strengthen economic recovery
President Barack Obama’s 2013 budget contains several key spending and tax measures aimed at boosting jobs and strengthening the delicate economic recovery by addressing weak consumer demand.
The proposed spending and tax measures would tackle the continuing weak demand that’s holding back job growth, keeping unemployment above 8%.
“The labor market still has a great deal of slack mainly as a consequence of continued weakness in demands for goods and services,” testified Doug Elmendorf, Director of the Congressional Budget Office. “The excess number of houses, loss of wealth, run-up in debt, and other legacies of the economic downturn are continuing to weigh on household and business spending.”
To keep consumer demand from waning, the White House has been pushing Congress to extend the payroll tax cut and unemployment benefits through the end of 2012. Congress is expected to vote on the two extensions by the end of this week.
- Extension of the payroll tax cut would help 160 million Americans. The 2% tax cut, set to expire at the end of this month, would save an average of $100 a month for an employee earning $50,000 a year. If the tax cut is extended, employees would continue to pay 4.2% instead of the regular 6.2% and self-employed workers (i.e. small business owners) would pay 10.4% instead of the regular 12.4% rate for Social Security tax. This would cost $94.3 billion in 2012-2013.
- Extension of unemployment benefits would keep 5 million out-of-work Americans out of poverty. The extension would help families pay their their bills, groceries, medicines, rent or mortgages and “create nearly 500,000 jobs as these benefits are spent quickly in the economy.” The measure would also provide funding for training and placement programs to help long-term unemployed workers find jobs. This would cost $44.2 billion in 2012-2013.
To create jobs – particularly in the construction sector wrecked by the housing meltdown – the President’s budget is asking for $50 billion in upfront funding to repair and improve highways, roads, bridges, rails, and airports, and the approval and permitting process would be expedited. The public infrastructure investments are expected to create “hundreds of thousands of jobs” within the next few years. Since public construction projects are awarded to private firms and contractors, this would benefit both businesses and laborers, and taxpayers could get more for their money due to the “historically competitive pricing in construction.” The six-year $476 billion transportation infrastructure program would be paid for by the “peace dividend” from the military drawdowns in Iraq and Afghanistan. (Many Republican lawmakers have objected to the “peace dividend” offset.) So instead of paying for reconstruction in war zones, the money would go toward rebuilding and improving aging domestic infrastructures upon which American industries and businesses rely to thrive.
Other temporary job creation and retention measures include:
- $30 billion to modernize 35,000 schools between 2012 and 2015
- $25 billion to help state and local governments prevent teacher layoffs in 2012 and 2013
- $5 billion to help local governments facing budget shortfalls retain first responders, such as firefighters, in 2012 and 2013
The budget also proposes two important tax incentives to help small businesses create jobs. One is a new 10% tax credit for employers who hire new workers or increase wages. If approved by Congress, the one-year tax credit would be applied to new wages or pay increases of up to $500,000. This tax incentive would cost $26.8 billion in 2012-2013. Additionally, the President’s budget calls on Congress to extend the business appreciation deduction, which would allow businesses to continue to write off 100% of new investments in 2013. This would cost $49.9 billion in 2012-2013.
“The President’s budget is a budget that’s good for the country. It’s good for jobs. It’s good in terms of nurturing a very fragile economy,” said Rep. Chris Van Hollen (D-Md.).
Why is the Obama administration focused on improving demand?
The economy is mending at slow rate because most middle-class Americans (the non-1%) are still feeling the financial squeeze and spending very conservatively.
Remember: Between 2007 and 2009, the Great Recession cost millions of Americans their jobs, their savings, their retirement funds, and their homes that hold much of their wealth. It wasn’t until March of 2010 – 14 months after Obama took office – that the economy began to improve. Since then, more than 3.7 million private sector jobs have been created.
Despite the encouraging news, many middle-class Americans are still rebuilding from the losses they’ve suffered during the recession. Basically, most Americans don’t have as much money to spend as they used to, which translates to weak demand.
This affects the supply side of the economy because businesses grow based on consumer demand. (Is there a point in investing money to make products or offer services if no one buys them?) Without robust demand, businesses are reluctant to hire workers or buy new equipments to help them grow. That’s why the job market remains soft and it takes people so long to find employment.
“The number one problem that small businesses say they have to deal with right now is lack of demand. They do not say access to capital. They do not say the burden of regulation. They say their order books are slim. So let’s pay attention to what the markets are telling us. That is why companies are not hiring as fast as they could,” explained Sen. Kent Conrad (D-N.D.). “We have weak demand. That tells us we need to take steps to strengthen demand but over time get back on track in terms of dealing with our debts.”
Addressing weak demand: spending versus austerity
The administration’s budget has been roundly criticized by Republican lawmakers, who want to reduce the long-term deficit solely through drastic spending cuts. The GOP-endorsed austerity measures would gut many non-defense programs like Social Security, Medicare, Medicaid, education, transportation, clean energy and others. Before the President’s budget was released, Republicans were also against renewing the payroll tax cut and unemployment benefits expire. Combined, these actions would significantly worsen demand as seniors receive less retirement benefits, low-income families pay more for medical care, and teacher layoffs mean more households are cutting back on their spendings.
“Our Republican colleagues have completely overlooked…the problem of weak demand and would actively make that problem worse by imposing fiscal austerity right now,” said Conrad. “As a result, their policy proposals of imposing fiscal austerity now would only further weaken demand, which would lower economic growth, kill job creation, and choke off the recovery.”
While the long-term debt is a pressing concern, choking off the economic recovery at this critical juncture would exacerbate the deficit. “If the economy was operating at its potential, the projected federal deficit in fiscal year 2012 would be about a third lower, or roughly $630 billion (4.0 percent of GDP) instead of the $973 billion (6.2 percent of GDP) projected,” according to the Congressional Budget Office. If the economy deteriorates, the government would receive less tax revenues and at the time the costs for social safety net programs would increase. This would add to the deficit. However, if the economy improves, then tax revenues would grow as people make more money and spendings for certain social safety nets would gradually decline as fewer people require government aid.
“We really need an economic two-step. We need short-term strengthening of demand by investments in infrastructure. That will help put people to work and also put us in a competitive position as a country. Second, and simultaneously, we should adopt a credible plan that puts us back on track the long-term fiscal condition of the country. We need to do that by tax reform, by reforming our entitlement programs, and by attacking wasteful spending,” said Conrad. “The two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible. Indeed, they are mutually reinforcing. And I believe that is precisely the balance that the President has struck in this budget proposal.”
- WhiteHouse.gov: Federal budget for FY2013 (PDF)
- WhiteHouse.gov: What $40 means
- Office of Management and Budget: Fact sheet on supporting small businesses and creating jobs
- Council of Economic Advisers: Employment situation in January 2012
- WhatTheFolly.com: Obama proposes job measures & tax reforms in 2013 federal budget
- WhatTheFolly.com: Transcript: President Obama’s remarks on the FY2013 federal budget
- WhatTheFolly.com: Transcript: Democratic Sen. Kent Conrad commends Obama’s budget for responsibly reducing long-term deficit & strengthening economic growth
- WhatTheFolly.com: Transcript: Democratic Rep. Chris Van Hollen calls Obama’s budget ‘good for the country’
- WhatTheFolly.com: Transcript: Testimony of Doug Elmendorf on CBO’s budget and economic outlook for 2012-2022
- WhatTheFolly.com: Transcript: Press briefing Q&A with GOP Senators on Obama’s budget
- WhatTheFolly.com: CBO report shows extending Bush tax cuts will raise deficit
- WhatTheFolly.com: CBO projects U.S. deficit to reach $1 trillion, unemployment to remain above 8% in 2012
- Congressional Budget Office: Doug Elmendorf’s written testimony on policies for increasing economic growth and employment in 2012 and 2013 submitted to the Senate Budget Committee on Nov. 15, 2011 (PDF)
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