Obama’s coin toss to businesses that hire and give pay raises is really just token help. I mean, really, it is more just peanuts and political symbolism than anything. What is $33 billion in tax credits for new jobs and pay raises worth in targeting on a true 17.5% unemployment rate in an economy the size of ours? Not much I suggest. Worse, it is just the sort of market distorting incentives that Washington too often uses to create problems and resource misallocations. That it is so small just may be its saving grace in this regard, ironically enough.
What is behind this feeble effort? In a word, it is Larry Summers, Obama’s chief economic advisor. Summers is basically a market fundamentalist who fought for deregulation of financial markets before the recession, as a high official in the Treasury Department. He and Greenspan worked especially hard to make sure the Fed and U.S. government did not do anything to regulate derivatives and credit default swaps well before the crash.
A clue here on what is going on is Summers recent statements, first, that 5.7% GPD growth for Q4 2009 is simply not enough and then, “it certainly doesn't suggest we are in any position to pop champagne corks." Summers explains, "We have a profoundly serious problem of unemployment and slow growth in middle income (families). We need to do a lot more.” What is a lot more, you might ask? The answer is the $33 billion incentives program, most likely funded from TARP repayment funds, so as not to run up the deficit further. Yet what does Summers really think? A bit later, he tells us: “First comes GDP growth, then comes the number of hours people work, then comes the level of employment, then comes the level of unemployment. We have a long way to go." As I say, the 33 billion for incentives is just tokenism.
The real opportunity to help with unemployment has largely come and gone. It was the massive public goods project Obama proposed originally: the repair and improvement of the Nation’s infrastructure. It never really got off the ground. Why, you might ask. Because Summers and the Wall Street bankers did not like the idea. That program too turned into tokenism. Just barely enough done to keep it from looking like Obama totally reneged on his campaign promise to “Rebuild America.”. There is some real cynicism at work here, I suggest.
There is a second irony involved too regarding Obama’s $33 billion for hiring and pay incentives. It is this: but for the fact we could have earlier instituted an effective infrastructure repair and rebuilding program and had it well on its feet by now seriously helping with unemployment, the current cosmetic tokenism may be precisely what is needed and not too late, in order to look like we are doing something about unemployment without running up larger deficits. If that is the case, then I suggest it is a bit of a fraud to sell the $33 billion incentives program as a real solution to anything here. The fact is unemployment will drop in time anyway and the Administration will assuredly attribute the drop to their incentive program, saying, “See, we did it.” As I say, there is some real cynicism involved here and I am sure it does not sit well with Obama.
Fortunately, now Summers is being pushed quietly aside more than a bit with Paul Volker’s growing role in seeking effective regulation and restructuring of our financial institutions. Volker has the physical and intellectual stature to get the job done. (He would also be a good man to reform the Fed, too, when things improve.) Summers has been and remains ideologically opposed to such regulation, notwithstanding the economic fiasco we have just gone through, in regard to which he played too substantial a role on the wrong side of the fence. He is clearly not the man to do the job. Guys who make big mistakes should be canned, not hired again to solve those problems.
The Administration’s real economic work now is to restructure and develop regulations for the banking and related industries. Obama is now turning aggressively in that direction. He needs to deal with the “moral hazard” problem and the “too big to fail” issue involved. Believing that were too big to be allowed to fail, the big banks took advantage and pursued risky high return investments, knowing Uncle Sam would come in and rescue them if their investments failed badly. That problem has got to be fixed. The bankers still think that way. That Volker is an inflation hawk shouldn’t be a problem in having him work on these problems.
In short, the $33 billion for hiring and other incentives is too little to be seriously useful. Not much can be done about unemployment now, short of another major stimulus program which (1) might not be necessary if the economy continues to improve well, and (2) would be properly opposed in the present circumstances by too many deficit hawks anyway. Obama is now starting to move in better directions, something I suspect he would have done earlier, but for listening to Summers.
Disclosure: none relevant