As fears in Europe have ebbed, this week has been dominated by speculation and anticipation concerning President Obama’s speech this evening. This much hyped address to the joint sessions of Congress will unveil the President’s new plan to add jobs to the economy. Unfortunately, his options are limited, so this will probably be a lackluster speech that will satisfy neither the Republicans nor the Democrats – much less the public.
His primary options are to extend unemployment benefits, cut taxes, or create public works programs. Each of these comes with serious tradeoffs that will likely result in a combination of extended benefits and cut taxes.
Extend Unemployment Benefits
On the positive side, unemployment benefits have been very important to the President for the past three years and now will most likely be no different. This is crucial in order to keep the housing market from sinking even further. These benefits are more likely to be spent (more on spending in the next section), thus feeding directly back into the economy.
On the negative side, unemployment benefits serve as a disincentive to search for jobs, but to what degree this occurs is debatable. Also, extending benefits will be difficult for Republicans to accept. The Republicans are adamantly against increasing spending and have been fighting to reduce unemployment benefits for the past several years.
The Republicans believe this is the absolute best course of action. By lowering personal taxes spending will be increased leading to greater corporate profits. By lowering corporate taxes (to 25%, Mitt Romney suggests) companies will have greater profits. These greater profits will allow companies to hire more people.
Lower personal taxes will probably take the form of extending payroll tax cuts that fund Social Security. As stated above, this will lead to more money in the hands of consumers than can be spent, making companies richer. But that does not necessarily translate into new jobs.
While the US does have one of the highest corporate tax rates in the world, which does give companies incentive to move abroad, it is unlikely that lowering the tax rate will boost jobs in the short run. Post-recession companies have had some of their best earnings ever. This was due to becoming more efficient and creating better systems to meet the needs of their customers – giving most companies little incentive to hire. Lower corporate taxes will probably simply translate into more corporate profits not more jobs unless they are on a scale that is likely unfeasible for the President to get passed.
Public Works Programs
Improving infrastructure is much needed in all 50 states, is very important to the country’s long term growth, and adds new jobs to the economy.
But public works can take years to get started and even longer for the real benefits to be felt. And, this is a spending increase that will not sit well with the Republicans.
What We Will See
All three options are potentially helpful, yet the political and practical costs will make it impossible for President Obama to propose anything useful. In order to extend unemployment benefits or create new public works programs, the President will have to include tax cuts – especially corporate tax cuts – in order to appease the Republicans. But these tax cuts will have to be limited in order to avoid the ire of the Democrats.
Adding to these political pitfalls is the memory of the recent debt crisis. After such an acrimonious debate over spending and taxes, Obama will be hesitant to risk going down that road once again.
The magnitude of any of these measures needed to have a noticeable effect on the economy will also pose a problem. The final tag will have to be in north of $500B – a sum that would be impossible to sell to the Republicans and difficult to sell to the Democrats. And the backlash from the public would destroy the little political capital that he has remaining.
All of this leads to the inevitable fact that we will see a mixture of unemployment benefits, tax cuts, and public works that will have too much spending for the Republicans, too many tax cuts for the Democrats, and be too ineffective to help the economy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.