Tonight, President Obama gave a speech outlining “The American Jobs Act” — a new piece of legislation that he intends to formally introduce next week. As the President noted in his opening remarks, most folks don’t care about political grandstanding. They want to see, feel and taste real improvement in the economy. While there are some signs of life in the U.S. economy, we are still grappling with high unemployment (9.1% in August — unchanged from July) and economic growth (measured by the change in the Gross Domestic Product) has dropped off to just 1% in August after surpassing the long-run average of 3.28% at the beginning of 2010.
How do we get Americans back to work AND boost the economy? Those are the tough questions we face. The Federal Reserve has nearly exhausted all of its tools designed to stabilize the economy. They have lowered interest rates to next to nothing. The idea there is that if interest rates are low, saving money is less attractive and therefore consumers will spend more. Specifically, they will purchase ‘big ticket’ items like cars and houses because they can borrow money at cheap rates. Similarly, low interest rates ought to entice businesses to invest in fixed assets (property, plant and equipment) for the same reason. Unfortunately, businesses and consumers just aren’t taking the bait as the Fed would like. Why not? A big reason is a lack of confidence. We tend not to like to part with our hard-earned dollars if we don’t know what’s around the corner. While no one’s ‘crystal ball’ is always accurate, there are times when we feel fairly comfortable about where the economy (and the country, for that matter) is headed and that the folks making the decisions know what they are doing. Unfortunately, this isn’t one of those times. Consumers and firms are nervous and uncertain and this shows in the markets. Spending is off. The stock market is volatile. Political approval ratings are at all-time lows. As my girlfriends would say, “it’s a hot mess!”
Another tool the Fed used was ‘quantitative easing’ or QE2 (the successor of QE1). In QE2, the Fed bought $600 billion in long-term Treasuries. The idea here was that buying a large quantity of Treasury securities will prop up demand. Basic economics tells us that an increase in demand will drive up prices. In bond markets, if prices go up, then interest rates go down which — as noted earlier — should increase spending. Another caveat to adjusting interest rates through the bond markets is that a drop in bond yields (interest rates) may drive some investors to the stock market. Again, the increase in demand should drive up prices and a rise in stock prices would be a strong positive indicator for the economy. Unfortunately, this plan didn’t work.
What now? If reducing interest rates and intervening in the bond markets hasn’t kickstarted the economy, what will? Enter the American Jobs Act. Ideally, consumers feel good about the direction of the country and the economy which encourages them to spend. That spending drives up demand for goods and services. That increased demand spurs firms to hire more workers to produce more goods and services. That increase in production results in economic growth and a reduction in unemployment. Our country has been in search of a catalyst to get this recovery cycle going and to keep it going. If we can’t entice people and firms to spend, why not try it in reverse? By creating a package of employment-based incentives, Americans should have more income available to spend and will hopefully do so because their own financial picture has begun to improve.
The Jobs Act has something in it for nearly everybody. Just take a look at the highlights:
- Small business tax cuts designed to get small businesses to hire workers and focus on growth;
- Targeted cuts and interventions to boost employment for specific groups like veterans and teachers while rebuilding and modernizing schools and the infrastructure;
- Help for those currently unemployed through unemployment insurance reform and incentives to hire long-term unemployed (currently 42.9% of the unemployed population) and
- Tax breaks for the middle class in the form of payroll tax cuts and mortgage refinance assistance — estimated to average $1,500 per family per year.
The good news is that this plan *should* be palatable to members of both major political parties because it contains elements that both sides have supported in their various districts. The bad news is that it will be expensive — $447 billion to be exact — broken down as follows:
- Small business: $70 billion
- Worker Incentives and Rebuilding/Modernization: $140 billion
- Unemployment Reform: $62 billion
- Middle Class Tax Breaks: $175 billion
So who picks up the tab for all of this? That still remains to be seen, but the President is adamant that the plan will not increase the deficit and can be funded through a combination of spending reductions and increased taxation on the wealthy and big business.
How will this affect you? It depends on who YOU are. If you are a small business owner, the President is looking at you to expand your business and thereby create new jobs and he would like to cut your taxes in order to encourage you to do so. If you are a veteran or a teacher, the President wants to give you an extra push to help you find/retain employment in an effort to show how much you are appreciated. If you have the skills to rebuild and/or improve schools, roads, cellular networks and the like, the President wants to create opportunities to make use of your talents in order to make America better and more competitive as compared to other nations. If you are unemployed or underemployed (working part time because that’s the only employment you can secure), the President wants to extend your unemployment benefits and give employers special incentives to hire you. If you are a member of the middle class, the President wants to make that temporary payroll tax cut permanent and help you refinance your mortgage at a low rate. If you are wealthy, the President wants you to help pay for this program through an overhaul of the tax code and believes that as a proud American, you will gladly do so in order to see the country get back on track.
Again, there is something in this Jobs Act for everyone. Will it work? Well, Congress has to pass it first . . .