Monday, June 13, 2011


As the presidential political campaign slowly comes together and the Congress and President confront the pivotal extension of the federal debt limit, the various approaches to the national financial crisis are becoming more clear. Not surprisingly, these strategies reflect general ideological preferences. What are still broad preferences with a few specifics will ultimately define themselves in to clear choices for voters in the 2012 congressional and presidential elections.

While the national debt has center stage in the debt ceiling debate, high unemployment i.e. "jobs", has the most political leverage. In the simplest terms the jobs conundrum is a circular one. Employers, both large and small, although reportedly holding cumulative financial assets approaching one trillion dollars, are reluctant to invest in business expansion and the attendant expansion of the work force because they cannot foresee increased demand for goods and services on the horizon. The large unemployed and under-employed national work force is unable or unwilling to spend at pre-recession levels thus holding down aggregate demand and perpetuating low employment levels.

In general, the Obama Administration and those on the liberal side of the argument prefer government spending programs to create jobs and thus stimulate demand in the private sector. They often cite the Roosevelt Administration's Works Project Administration which was created in the response to the "Great Depression" of the 1930's and which put thousands of unemployed citizens to work on national infrastructure projects like roads, bridges, national parks, and dams.

Generally respected columnist Fareed Zacharia has proposed a federal "infrastructure bank" which would fund such projects by issuing bonds. The expected upside of such a strategy would be that the bonds would take advantage of current low interest rates, the employment boost from providing construction jobs would be significant and the nation's badly deteriorating infrastructure would be repaired.

The downside is that the hundreds of billions of dollars in bonds which would be needed to have an impact on both unemployment and infrastructure represents more federal debt. Government estimates indicate that "each $1 billion spent on construction should create roughly 19,600 construction jobs, each lasting a year". Thus to create 2 million temporary construction jobs would require additional federal debt of $104 billion. Government construction projects produce no profits with which to pay the interest on the debt. Infrastructure projects in state and local communities are also funded with bonds but the interest on the bonds is paid for with tax revenues. This would also be the case in any federal bond scheme.

While putting construction workers back to work would be beneficial in any strategy, the "infrastructure" scenario promoted so often by liberals is overstated as a solution to both the unemployment problem and the effect it would have on the national economy.

In 2009, 12.4 percent of all unemployed workers were previously employed in the construction industry, roughly 2 million individuals. In May, 2011 the total number of unemployed in the U.S. was just under 14 million with as many as six million more having given up looking for jobs or in the ranks of the "underemployed". Thus if all unemployed construction workers were hired by a federal infrastructure program, 87.6 % of unemployed workers would not be directly affected. Much of the unemployment in the construction industry comes from the devastated housing market. The construction materials industry that supports that market also contributes to the overall unemployment rate. Infrastructure, roads, bridges and dams would not affect workers in either of these fields.

There is an additional sidebar to the infrastructure strategy. The Center for Immigration Studies has estimated that about one out of seven (or 15 percent) of workers employed in construction in the United States are illegal immigrants. Without some kind of monitoring system, which would be opposed by the political Left, some 300 thousand illegal immigrants would be put back to work by U.S. taxpayers.

Republicans in Congress prefer to rely on the private sector to stimulate job growth. This approach avoids several problems: the temporary nature of government spending programs to stimulate employment; the excessive costs and federal debt incurred at a time of crisis level debt (fast approaching 100% of GDP) and the inevitable tax increases that would be needed to pay for the additional federal spending. The Republican approach, now being laid out by members of Congress and Republican presidential candidates generally involves deregulation and tax reductions on both individuals and businesses to put more money into the economy and stimulate both business investment and consumer spending.

Presidential candidate Tim Pawlenty has proposed reducing the business tax rate to 15% from its current 35% level. This loss of revenue would be off set to some degree by eliminating all tax deductions. He would expand the lower tax rate eligibility to S-Corps (personal corporations) and Limited Liability Corporations to simulate business creation in the small business sector which is the major provider of non-government employment.

Pawlenty would also reform individual tax rates by eliminating all but two which would be at the 10% and 25% level. This approach, along with reform of business restricting regulations and privatization of some federal government services, relies on stimulating the free market and increasing the money supply without the use of government funds. The potential down side of course is timing. Unlike direct government spending, there would be a lag of undetermined length between the reforms and the hoped for employment boost based on business expansion and individual tax reform. Unless these reforms were accompanied by significant cuts in federal spending, they, like the Democrats preferred strategy of increased spending, would create significant federal debt problems because of the loss of tax revenue. Republicans in Congress are committed to major cuts in spending but these will not occur on the level they seek without Republican majorities in both houses of Congress as well as control of the White House after 2012.

The conservative approach to job growth is also part of presumed presidential candidate Representative Michelle Bachmann's (R-MI) strategy. She would reduce the corporate tax rate to 9% and eliminate the capital gains tax, the Alternative Minimum Tax and federal inheritance taxes.

Thus the Republican's are offering a clear alternative to the Obama Administration and the Democrats in the Senate. Up till now President Obama's "plan" to stimulate job growth is somewhat indistinct. He keeps talking about "green jobs" but offers few specifics with respect to government policy. After two years of high unemployment he still prefers to "consult" rather than lead.

"I'll travel to North Carolina where I'll meet with my Jobs Council and talk about additional steps we can take to spur private-sector hiring in the short-term and ensure our workers have the skills and training they need," he said."

"Obama said investing in education and alternative energy would improve the job market but offered no specifics. An administration official said on Thursday the White House was discussing the idea of a temporary cut in payroll taxes that employers pay on wages, among other measures."

Obama will eventually be forced to offer a plan as the presidential campaign approaches and the pressure to respond to the Republican candidate’s ideas becomes intense. In the meantime, voters will have plenty of time to absorb and analyze the the Republican approach in the absence of a Democratic plan.


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