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A Stimulus We Can Believe In

Is President Obama’s stimulus working? A June Rasmussen Reports survey showed that 45 percent of those polled think the President …

Is President Obama’s stimulus working? A June Rasmussen Reports survey showed that 45 percent of those polled think the President should discontinue federal spending despite the administration having spent just $44 billion of the $787 economic rescue package.  About 36 percent of those polled in a telephone survey think the government should keep spending the money and 20 percent were not sure.  About 44 percent of those polled said the increased spending will be bad for the economy, compared to 39 percent who said it would be good and 8 percent who said it will have no impact.  The survey showed that 48 percent of Americans said the stimulus spending does not create jobs, while 31 percent said it did and 21 percent were not sure.

Within a day of the Rasmussen Report findings the President announced plans to speed up stimulus spending this summer in an effort to “save or create” 600,000 jobs.  The stimulus bill signed into law earlier this year was designed to create and preserve jobs. Since Obama’s Feb. 17 signing of the “stimulus” bill, the U.S. has lost at least 1.5 million jobs, according to Bureau of Labor Statistics data.   According to Recovery.gov, $43.73 billion of the “stimulus” funds have been spent as of May 29. Dividing $43.73 billion by the 1.5 million jobs lost since the signing of the “stimulus” means that taxpayers have been socked with $2,900 per lost job.

Since job creation is problematic with unemployment edging close to 10 percent the White House has introduced the notion of “saved” jobs.  But this metric was best debunked by the chairman of the Senate Finance Committee, Max Baucus (D-Mont.) on March 4 while challenging Treasury Secretary Tim Geithner’s use of the term:

SEN: MAX BAUCUS: “You created a situation where you cannot be wrong. If the economy loses 2 million jobs over the next few years, you can say yes, but it would’ve lost 5.5 million jobs. If we create a million jobs, you can say, well, it would have lost 2.5 million jobs,” Baucus said. “You’ve given yourself complete leverage where you cannot be wrong, because you can take any scenario and make yourself look correct.”

According to the latest statistics from the U.S. Census Bureau, 98 percent of all U.S. firms have fewer than 100 employees.  Ninety percent of all firms in the U.S. have fewer than 20 employees and are responsible for over 97 percent of all new jobs in America. These 27 million firms employ over 50 percent of the entire private sector workforce.  Yet not one line of the bill contains specific language to direct spending to small businesses that are largely responsible for creating jobs. In the absence of legislative language to specifically direct the billions of dollars in stimulus spending to small businesses, over 90 percent of all prime contracts from the stimulus bill will likely go to approximately 2 percent of U.S. firms. This would seem to run contrary to the bill’s stated mission of creating jobs.

So here’s a suggestion for the President that wouldn’t cost the taxpayer anymore and give his goal of stimulating job growth a real shot in the arm. Temporarily suspend the 14 percent payroll tax, a tax that hits employers and employees equally.  That’s right, just cut it out for the next 12 months. An executive order should set the tax aside giving employers an immediate boost in cash flow equivalent to 7 percent of each employee’s wages and give each wage earner an equal 7 percent boost of his earnings in take home pay.  Since all the stimulus money is borrowed anyway the government could replenish the lost revenue by diverting the appropriate amount from the stimulus funds.  In this way every business would receive an immediate jolt of extra cash that would permit it to hold onto its workforce and maybe even invest for when the recovery comes. Wage earners would feel the “stimulus” as soon as the next paycheck. No waiting around for “shovel ready” projects that are years in the future.

While he’s at it, the President could also waive all fees for small business loans from SBA and other agencies.  Here again the lost revenue could be made good with funds from the stimulus package since all the money is to be borrowed anyway and most of it hasn’t been spent.

Would it work?

Common sense should tell our lawmakers that of all the institutions in the U.S. small and medium size businesses are best equipped to actually achieve the stated goal of saving and creating jobs.  Several months ago Stephen Reister, Principal of Steel-T Heating and Air Conditioning, testified in front of the House Small Business Committee at the invitation of U.S. Rep. Mike Coffman (R-Colorado).  Based in Englewood, CO.  Steel -T has 41 employees and installs ozone-friendly air conditioners and furnaces that are over 90 percent more efficient than the national average.

Reister’s testimony focused on government policies in regards to small businesses and economic growth.  Coffman points out on his web site that “Steel-T has no bank loans and uses no lines of credit to aid the business. The company reinvests in itself and in its employees who keep it running.”

“Small Business is the backbone of the economy and the country. We need the government to give incentives and tax breaks to small businesses that are debt free and helping drive the economy,” Reister said in his testimony.

The Steel-T Heating and Air chief also noted the burden of the federal tax code and skyrocketing health care costs on small businesses. He asked congress to aid small businesses keep their costs down in order to promote economic and business growth.

“Our current federal tax rate is extremely high and we have not seen the loop holes that many people speak about businesses taking advantage of in the federal tax code,” Reister said. “We have health care and pay a great portion of it for our employees. Help us keep costs down by limiting the paperwork that is required by insurance companies from both the insured and the doctor’s office.”

“Congress must reduce the tax burden on small businesses if we are serious about combating our unemployment,” Coffman concluded. “This will allow companies, like Steel-T, to create more jobs and grow their businesses.”

Now among the President’s circle of economic advisors cutting taxes has a bad odor. The neo-Keynesians like Larry Summers who heads the National Economic Council and Austin Goolsbee, the University of Chicago economist who serves as Obama’s adviser are convinced that a dollar of government spending has a greater multiplier effect than a dollar of tax reduction. But other economists such as Robert Barro of Harvard say the empirical evidence suggests that this isn’t the case.  In an interview with “The Atlantic” he stated “When you cut taxes there are two different effects. One is that you cut tax rates, and therefore give people incentives to do things like work and produce more and pay more — maybe, depending on what kind of taxes. And then you also maybe give people more income. This income effect is the one that’s related to this Keynesian multiplier argument, where it’s usually argued that government spending should have a bigger effect.  But the tax-rate effect, inducing people to do things like work and produce more and invest more, is a whole separate effect, and that could easily be much bigger than the multiplier thing, than the income thing.”  

Nor is Barro alone in having examined this closely. Before she was appointed to chair the President’s Council of Economic Advisors, Christina Romer taught at Berkeley and with her husband David came to much the same conclusion. The two California-Berkeley professors have published a variety of papers together, which at times run counter on fiscal policy to Obama’s own opinions.  Some of this research is in a March 2007 paper, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.”

“Tax changes have very large effects on output,” the Romers wrote. “Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large.” The Romers found that attempts either through tax or spending policy to counter the business cycle are ineffective but that investment is highly responsive to other tax cuts. In other words, if she believes her own research, Christina Romer should be a strong critic of her boss’s policies.

In a period of recession it is easy to argue that an acceleration of government spending can have a stimulative effect on the economy. It is important, however, to consider how the money is spent. According to Harvard’s Barro the White House’s thinking “ has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people.”  If so, it may be quicker to have the U.S Air Force fly over each of the 50 states and shower the populace with crisp Federal Reserve bank notes. That could have a highly stimulative effect.

About J.P. Donlon

J.P. Donlon
J.P. Donlon is Editor Emeritus of Chief Executive magazine.