Put more money in consumers' pockets to boost recovery
鈥淚 am concerned about the fact that the recovery that we鈥檙e on is not producing jobs as fast as I want it to happen,鈥� President Obama said Tuesday, amid the flood of bad economic news, including last Friday鈥檚 alarming jobs report.
Does this mean we鈥檙e about to see a bold package of ideas from the White House for spurring growth of jobs and wages? Sadly, it doesn鈥檛 seem so.
Obama says he鈥檚 interested in exploring with Republicans extending some of the measures that were part of that tax-cut package 鈥渢o make sure that we get this recovery up and running in a robust way.鈥�
Accordingly, the White House is mulling a temporary cut in the payroll taxes businesses pay on wages. White House advisors figure this may appeal to Republican lawmakers who have been discussing the same idea. It would, in essence, match the 2 percent reduction in employee contributions to payroll taxes this year, enacted as part of the deal to extend the Bush tax cuts.
Other ideas under consideration at the White House include a corporate tax cut, accompanied by the closing of some corporate tax loopholes.
Can we get real for a moment? Businesses don鈥檛 need more financial incentives. They鈥檙e already sitting on a vast cash horde estimated to be upwards of $1.6 trillion. Besides, large and middle-sized companies are having no difficulty getting loans at bargain-basement rates, courtesy of the Fed.
In consequence, businesses are already spending as much as they can justify economically. Almost two-thirds of the measly growth in the economy so far this year has come from businesses rebuilding their inventories. But without more consumer spending, businesses won鈥檛 spend more. A robust economy can鈥檛 be built on inventory replacements.
The problem isn鈥檛 on the supply side. It鈥檚 on the demand side. Businesses are reluctant to spend more and create more jobs because there aren鈥檛 enough consumers out there able and willing to buy what businesses have to sell.
The reason consumers aren鈥檛 buying is because consumers鈥� paychecks are dropping, adjusted for inflation. And job losses are mounting. The 83,000 new private-sector jobs created in May represent a net loss because 125,000 jobs are needed merely to keep up with an expanding labor force. The number of Americans filing new claims for unemployment benefits edged higher last week.
At the same time, many Americans are falling behind in their mortgage payments. And housing prices continue to drop 鈥� making homeowners feel even poorer.
Close to 60 percent of the half-trillion drop in household debt since the depth of recession has been defaults rather than repayments. This makes it harder for people who鈥檇 like to enter the housing market to get new mortgage loans, or for anyone to refinance. Other consumer debt burdens are rising. On Tuesday the Fed reported consumer credit outstanding rose in April 鈥� mostly from record-high levels of student-loan debt and an up-tick in credit-card borrowing due to food and gas price increases outpacing wage gains.
All this translates into a continuing crisis on the demand side. Consumers can鈥檛 and won鈥檛 buy more. Between January and March, sales grew just .15 percent around the country 鈥� perilously close to no growth at all. May sales look even worse. Chain stores are reporting weaker sales. Consumer confidence has dropped sharply.
How to get jobs back, then? By reigniting demand. Put more money in consumers鈥� pockets and help them renegotiate their mortgage loans.
For example: Enlarge the payroll tax break for workers 鈥� not just for employers. Exempt the first $20,000 of income from payroll taxes for a year. Create a WPA for the long-term unemployed. Allow distressed homeowners to declare bankruptcy on their primary residence, thereby giving them more clout with lenders to reorganize their mortgage loans. Lend federal money to (rather than bail out) states and cities that are now firing platoons of teachers, fire fighters, and other workers because state and local coffers are empty.
But we鈥檙e not hearing any of these sorts of demand-side solutions from the White House. In seeking Republican votes, Obama is putting forth Republican supply-side ideas 鈥� lowering the employer costs of hiring, cutting corporate taxes 鈥� that have nothing to do with this demand-side crisis. He may attract some Republican votes for these, but what鈥檚 the point if they鈥檙e irrelevant to the real problem?
The President鈥檚 putative embrace of the false notion that businesses need more financial incentives in order to hire also risks giving legitimacy to other Republican supply-side nostrums being pushed by House Republicans and GOP presidential aspirants. On Tuesday, Tim Pawlenty called for lower taxes on corporations (down to 15 percent from the current 35 percent), and lower taxes on the rich (to 25 percent from the current 35). Newt Gingirch wants to lower corperate income taxes to 12.5 percent and eliminate the estate tax altogether. And so on.
Better that the President advance ideas that work, and go to battle over them.
Supply-side economics doesn鈥檛 work. It鈥檚 been tried for thirty years, to no avail. And now, when our continuing economic crisis is so palpably being driven by inadequate demand, it鈥檚 bogus than ever.
The last thing we need is for the President to go over to the supply side.
--------------------------
海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on .
