After over a year of Presidential and Congressional debate and sparring about how to reduce spending, cut deficits, and limit debts, the politicians in Washington have finally taken notice that we have a “jobs crisis”.  Specifically, we simply aren’t creating new employment fast enough to reduce our high levels of unemployment.

Timidity wrapped in strong words does not make boldness. The words on the teleprompter were bold and the President almost sounded passionate and concerned about jobs.  Unfortunately, in my opinion, this proposal is too timid. I see repeats of the errors of 2009 and the first stimulus bill, the ARRA.

First, let’s go over the details of the proposal.  The White House Fact Sheet is here. I’ll let Calculated Risk summarize the key parts for me:

1) Payroll tax cuts (approx $240 billion):

• Cutting payroll taxes in half for 160 million workers next year: The President’s plan will expand the payroll tax cut passed last year to cut workers payroll taxes in half in 2012 …
• Cutting the payroll tax in half for 98 percent of businesses: The President’s plan will cut in half the taxes paid by businesses on their first $5 million in payroll …

2) Schools and teachers / aid to states (approx $60 billion):

• Preventing up to 280,000 teacher layoffs, while keeping cops and firefighters on the job.
• Modernizing at least 35,000 public schools across the country,supporting new science labs, Internet-ready classrooms and renovations at schools across the country, in rural and urban areas.

3) Other infrastructure ($75 billion)

4) Extend unemployment insurance benefits ($49 billion).

5) Helping More Americans Refinance Mortgages (there are no details yet). “The President has instructed his economic team to work with Fannie Mae and Freddie Mac, their regulator the FHFA, major lenders and industry leaders to remove the barriers that exist in the current refinancing program (HARP) to help more borrowers benefit from today’s historically low interest rates.”

In total the whole package is estimated as a near $447 billion package of tax cuts and spending.  That sounds like a lot. And at first comparison it seems like a lot. The 2009 ARRA “stimulus” bill was approx. $780 billion spread out over 2.5 years. This “American Jobs Act” is supposed to be only a one year deal (part of the problem, by the way), so it sounds like it’s more in one year than the 2009 stimulus bill was.  But it’s not really.

For any government action, be it increased spending, tax cuts, or regulatory reform, to be a stimulus effect, it must provide a net change beyond what is currently happening.  That’s a major reason why this proposal fails as a stimulus.  Over half of the proposal, the $240 billion in payroll tax cuts provides no new stimulus beyond what’s happening this year already.  These payroll tax cuts, which should be called  cuts in funding for Social Security and Medicare, aren’t really a tax cut from what’s happening now.  It’s a proposal to delay the return to higher rates.  Payroll taxes were already cut temporarily for one year at the beginning of this year as part of the deal with Congress to extend income tax cuts for the highest-income bracket folks.  But that was only supposed to be a one-year cut.  This proposal basically extends that cut for another year and postpones the return to normal tax rate for another 12 months.  If these payroll tax reductions were enough to put people back to work in large numbers we would have seen it happen already.  We haven’t.  Deciding to delay applying the brakes as you had planned is a good thing, but it hardly qualifies in my book as hitting the accelerator.

In a similar fashion, the $60 billion in aid to states & local governments to help prevent teacher, police, and firefighter layoffs is a good and positive measure.  But it’s not really stimulus.  It’s a step that keeps the states and local governments from harming us further through their budget cuts.  I am concerned this only kicks the can down the road a little further, perhaps another 12-15 months, when state and local governments will repeat the layoff drive. Of course, if I were cynical, I’d observe that 12-15 months doesn’t really change the long-run growth picture for the U.S. but it’s enough to delay any second dip into recession until after the next presidential election.

We see the same dynamic in the extension of unemployment benefits.  Make no mistake, this is a seriously needed action for both economic and moral reasons.  But it won’t have a lot of stimulus bang – certainly less than the $49 billion sounds like.  That’s because it’s basically restoring the existing unemployment benefits that are expiring for the long-term unemployed.  Thus it will help prop up existing aggregate demand, but it’s not likely to deliver much new stimulus punch.

Part of the $60 billion  for schools and teachers (the White House doesn’t split it out) is aimed at infrastructure re-building for schools.  My estimate is that maybe it’s half of the $60 billion, or $30 billion.  That portion, along with the $75 billion in other infrastructure spending constitutes real stimulus.  It’s additional spending that will translate directly into new jobs. Those new jobs will then have a multiplier effect as these workers spend their money.  Unfortunately, both of these items together total maybe a little over $100 billion.  Even with estimates of spending multipliers on the high side at 2 or 3, it means a boost of maybe $200-300 billion in GDP.  But we’re in a more than trillion dollar hole of lost GDP potential.  So, yes, there’s some stimulus here, but it’s far too little.  Just like the 2009 stimulus bill was too small and too slow.

There are of course, some other items in the proposal.  I don’t see them having any effect.  There are proposals for some tax credits for small businesses to hire some businesses.  I don’t see that working.  Businesses hire because they are selling things, not because they can get a $5,000 tax credit.  There’s simply not enough aggregate demand for businesses to hire.  There’s also a pitch about helping Americans “refinance mortages”.  They tried this in 2009 and the program has been a miserable failure with very few refinancings done.  The incentives simply are wrong for the banks.  The proposal lacks specifics other than the President will “urge” agencies to do more.  I am skeptical.

So overall, I am disappointed.  Much of this stimulus proposal amounts to agreeing to delay the current contractionary policies.  That’s not the same as stimulus.   Too little. Too late.  And let’s remember, there’s not much chance that this Republican House of Representatives will pass much, if any, of this proposal.