Can a mix of tax breaks for individuals and businesses, infrastructure spending, and aid to state and local governments that is bound to be significantly smaller than the package proposed by the president Thursday night jolt the economy out of its doldrums?
As the details of his jobs plan emerged during the half-hour address to a joint session of Congress, it quickly became apparent that President Obama had listened to advisers from the left side of the political spectrum, who have been calling on the White House to issue a big and bold jobs plan to stimulate the economy. The president’s shrinking poll numbers – the latest Gallup poll shows just 41 percent of Americans approve his performance as president – undoubtedly had an impact on determining the size of the package.
In the days leading up to the nationally televised speech, the media had speculated that Obama would call for $300 billion in new spending and tax cuts. His $447 billion proposal, which included $253 billion in tax cuts and $194 billion in new spending, clearly exceeded those expectations.
But while even top Republicans on the Hill found some things to like in what the president called the American Jobs Act, many of the specific programs are likely to become bogged down in the usual wrangling on Capitol Hill. That will no doubt shrink the size of the stimulus that eventually passes.
“It seems the president was saying all or nothing, and if that doesn’t happen, he would seek to hold us accountable,” House Majority Leader Eric Cantor, R-Va., said on CNBC-TV. “That’s not the right approach.”
There’s also the issue of how to finance whatever package emerges from the negotiations. The president vowed to pay for every dime of the new tax cut-and-spending plan, and even pledged by a week from Monday to come up with a long-term deficit reduction plan that will exceed the $1.5 trillion goal of the Congressional Super Committee, which is slated to deliver its plan by Thanksgiving.
Where will the money come from? In what amounted to a finger-wag at his progressive supporters, he signaled that changes in Medicare, the senior citizen health care program, are likely to be part of the mix.
“If we don’t reform the system while protecting beneficiaries, it won’t be there when future retirees need it,” the president said. “We have to reform Medicare to strengthen it.”
Raising the specter of Medicare cuts will only make it more difficult to assemble the Congressional coalition needed to pass a significant economic stimulus package. Many Democrats are planning to use Republican support for privatizing Medicare as a major campaign issue in next year’s elections. Casting an “aye” vote for a stimulus “pay-for” that includes Medicare cuts will undoubtedly be used by Republicans next year to undercut their message.
However, the president is hoping politics-as-usual will give way to today’s economic reality, which is grim. Growth slowed to near stall speed in the first half of the year, and only 100,000 new jobs have been created in the last three months. The economy needs more than twice that many new jobs a month for the next four years to return to full employment.
As has been his forte throughout his political career, Obama seized the moment to deploy his considerable rhetorical skills in support of a Keynesian stimulus program. Only 24 hours earlier, the leading contender for the Republican nomination for president, Texas Gov. Rick Perry, had declared Keynesian economics dead and buried.
“The question is whether in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy,” the president said at the outset of the 30-minute speech. “Everything in here is the kind of proposal that has been supported by both Democrats and Republicans, including many of whom who sit here tonight.”
The proposal clearly leaned towards the politically achievable. Its tax-cut centerpiece was an expansion of the 2 percentage point worker payroll tax cut that was enacted last year to 3.1 percentage points for both employees and employers. The president also called for eliminating employer payroll taxes for new hires and special tax credits for hiring the long-term unemployed.
Those proposals, which could start as early as October 1, could pump as much as $240 billion in new spending into the economy in the next year. Republicans on the Hill during last year’s lame duck session supported the payroll tax cut, and are likely to do so again.
The spending side of the legislation is more problematic. Its centerpiece, $105 billion in infrastructure spending, includes a major infusion of new cash into an infrastructure bank. While a bi-partisan infrastructure bank proposal has been introduced by Senators John Kerry, D- Mass., and Kay Bailey Hutchison, R-Tex., House leaders like Rep. John Mica, R-Fla., chairman of the Transportation and Infrastructure Committee, have said they want the money funneled through the states rather than the federal government.
Experts who’ve studied the 2009 stimulus plan say funneling money through the states will likely retard the effectiveness of the spending. “You want stimulus out on the streets right away,” said Robert Inman, a professor of finance at the University of Pennsylvania’s Wharton School of Business. He recently studied the effectiveness of stimulus spending for the Philadelphia Federal Reserve Bank. “Give it to the states and about 30 cents hits the streets right away, with the rest finding its way into a state savings account and then dribbling out over the next eight to ten years. States are going to be setting policy according to their own incentives,” he said.
Other elements of the spending plan are also likely to receive a chilly proposal from Republicans on the Hill. The proposal calls for extending unemployment insurance for the long-term unemployed ($54 billion) and more direct aid to ailing state government budgets ($35 billion).
“Pass this jobs bill and thousands of teachers will go back to work in every state,” the president said. “Pass this bill and put our teachers back in the classroom where they belong.” Not a single Republican joined Democrats in applauding the line.
If Republicans agree and a shrunken version of the plan offered Thursday gets passed, will it be sufficient to kick-start the stalled economy? Citing low-hanging fruit in the package like the pending free trade agreements with South Korea, Colombia and Panama, General Electric CEO Jeffrey Immelt, who also co-chairs the president’s jobs council and sat near First Lady Michele Obama during the speech, suggested passing anything in the current political environment could have a positive impact on growth.
In an interview with CNBC-TV after the speech, Immelt said, “The spiritual advantage of getting anything done right now will have an uplifting effect on the economy.”