CONTRIBUTORS

Obama plan would put money in right places

Posted Oct. 19, 2011, at 4:52 p.m.

With the American Jobs Act, President Obama has given us about the best plan that could have any chance of making it through Congress, even if it’s a very small chance.

Roosevelt would have put far more into direct relief and into roads, bridges and schools. But Roosevelt had massive Democratic majorities in both houses of Congress. Obama has to work with what he has, including a large Republican majority in the House.

Obama is attempting an end run around the Republicans by substituting tax expenditures for most spending. For example, instead of having the federal government hire people, he offers substantial tax breaks for private business to hire people. In fact, tax breaks constitute $240 billion of the whole $447 billion package, including specific tax breaks for hiring veterans, teachers and the long-term unemployed.

In some ways, this resembles Republican plans for creating jobs by cutting taxes for the rich. But in the Republican plans, the rich do not have to create jobs; they are free to invest their tax savings in stocks, bonds or South African gold shares. In our economy, money rises to the top, where it stagnates.

The top 500 U.S. corporations hold an astounding $2 trillion in cash, meaning they could kickstart our economy by themselves, twice, if they wanted to. But they don’t want to. They won’t start making the investments that create jobs until demand picks up.

The tea party alternative is to cut spending until it matches revenue. This was the Herbert Hoover solution. Early in the Great Depression, President Herbert Hoover tried to hold the line on spending. He sent the economy into a tailspin instead.

From 1929 to 1932, gross domestic product dropped an incredible 24 percent, and unemployment swelled to 25 percent. In 1933, Roosevelt took office and embraced deficit spending. In his first term, GDP increased 35 percent, and unemployment dropped to 10 percent.

The fact is, we have never overcome large deficits by cutting spending. During the Eisenhower years, after World War II, and during the Clinton years of the 1990s, we grew out of deficits. So even if the deficit is your first priority, ahead of jobs, you need to promote growth and jobs to defeat the deficit.

Other important parts of Obama’s plan are extending unemployment benefits and increasing the Low Income Home Energy Assistance Program. Finally, he plans to pay for it all by canceling a long list of tax breaks that chiefly benefit the rich. Thanks to those benefits, Warren Buffett pays a lower rate of tax than his secretary.

Republicans argue that raising taxes for the rich will sabotage the economy. Economists have a way of settling the question. They compare the effect on the economy of different policies by looking at the effect in dollars and cents on the gross domestic product from a one-dollar reduction in federal tax revenue or a one-dollar increase in spending. This is a powerful tool.

According to Moody’s Analytics, making dividend and capital gain tax cuts permanent to keep Warren Buffett’s taxes low benefits the general economy only 39 cents per dollar of revenue lost. But extending unemployment benefits returns $1.55 per dollar spent, four times as much. That is because the unemployed spend nearly every dime they can get, and they spend it where most of it gets spent again.

We also want something to show for our money. Fortunately, right now we can get very favorable bids for fixing our crumbling roads, bridges and schools. That work returns $1.44 per dollar, almost as much as unemployment insurance.

I could go right down the list. Every spending increase or tax cut favored by Obama has a multiplier of 1.05 or better; every tax increase he favors (as nearly as I can figure) has a multiplier of .39 or less.

Republican John Boehner claims that Obama’s plan is just a rerun of the 2009 stimulus program, and that the stimulus failed. Boehner wants us to forget the panicky days of September 2008, when the financial system teetered on the brink of collapse, and 2009 when GDP dropped 3.5 percent. In 2010, as the stimulus took hold, GDP increased 3 percent. We will be even better off with the American Jobs Act.

Rufus Wanning lives in Orland.

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