There has been a lot of praise about Obama’s jobs speech that he delivered last night, both in style and in substance. I thought the style was just fine, and has set Obama up in a position where he can clearly smack Republicans in the general election should they resort to obstructing the American Jobs Act. And they shouldn’t! It’s a very Republican-friendly plan and I do have to say that I admire many of the different projects on merits, but I can’t help by think that the plan and the subsequent cacophony of commentary is fiddling around the edges while dodging what has been the fundamental problem of the last few years — a problem that only the Fed can remedy — and that is abysmal growth in nominal spending.
The plan broadly consists of three classes of measures, the first is cutting the payroll tax on both the employer and employee side. Along with my co-blogger Karl, I am in favor of this proposal as a measure to remove supply side barriers to new hiring. While Karl’s preferred plan is to cut the payroll tax to zero, this plan is none-the-less fairly bold…however, I am skeptical that it will deliver the amount of new hiring that Obama is promising.
The second measure is tax incentives for hiring specific classes of people. In this case, there is an incentive for hiring veterans, the long-term unemployed, and for giving raises to current employees. I am roundly not in favor of this type of policy, especially the incentive to artificially prop up wages. The last time this was tried as a counter-recessionary measure was the 1933 National Industrial Recovery Act (which subsequently choked off the fastest recovery in American history). Now, it is hardly the case that money wages will jump 20% overnight after the passing of this bill, but if you’re in the business of wanting to to jump-start new hiring, incentivizing higher wages (and thus, necessitating higher productivity) is clearly the wrong way to go about it.
The third part of the plan is direct spending on infrastructure — namely schools and transportation. Sure, great, do it! Real rates are at zero or below all the way out to 10 years…that means (as has been pointed out ad nauseam) it’s cheaper to borrow than to tax now, and defer taxation to the future, when there will presumably be robust growth. I don’t know the specifics, but I’ve heard talk about an infrastructure bank that will provide safe, liquid assets to private investors and provide loans to contractors. It is all well and good that the government maintain infrastructure that is already in the public domain…after all, we’ve already built it, and built our lives around it, might as well maintain it until such a time we devise a different arrangement. My problem is with characterizing infrastructure spending as “stimulus” that will “employ millions of people”. There are plenty of hurdles to jump there, and the spending is slow. Worthwhile “shovel-ready” projects, while much talked about, always fail to materialize at the time they are needed.
Whatever the well-meaning intentions of the designers of these plans, I heard nothing from Obama or anyone else regarding the real issue, depressed nominal spending. Imagine a scenario in which the AJA takes effect, and achieves the maximum spending multiplier ever dreamed up in a model. All of this extra nominal spending (demand) would eventually lead to rising prices, most immediately in sensitive commodities such as food and energy. Now, imagine that the monetary authority views sub-2% inflation as optimal…and is internally pressured to begin unwinding their balance sheet (tightening policy). Rapidly rising prices would be a great cover that would allow them to choke off any good created by the miracle supply-side fiddling that you engaged in with your jobs act. I was disappointed by the prospects of further monetary easing in Bernanke’s Jackson Hole speech. However, there has been a lot of clamoring around the blogosphere (even making it to the WSJ) regarding the actions of the Swiss National Bank. Perhaps I’ll be gleefully proven wrong!
Obama’s plan will succeed to the extent that the Fed allows it…and just for reference, here is the Cleveland Fed’s expected inflation yield curve: