Tax Analysts Blog

Blowing Bubbles, Appeasing Unions, and Talking About Jobs

Posted on Nov 13, 2009

To save the economy from collapse the Fed has printed money and cut interest rates like never before. But the benefits of this policy are not spread evenly over the economy. Two columns in today's papers make this point. In the Financial Times, Samuel Brittan writes:"Unfortunately, instead of being dropped by helicopter this cash is being injected into the banks that have a thousand and one excuses for not passing it on in loans to businesses or households. " And in the Washington Post Steve Perlstein makes the same point:: "That [i.e., the Fed's recent policy] might make some sense if all this credit was flowing to worthy households and businesses. The evidence, however, suggests that much of it is going toward short-term financial speculation that is great for boosting bank profits and fattening the bonuses of Wall Street wise guys -- but lousy at producing sustainable long-term growth."

So Wall Street is booming while the latest data from the Labor Department puts the unemployment rate at 10.2 percent. Of course this scares the heck out of incumbent Democrats (especially after their 0-for-2 showing in the gubernatorial elections). The only really good way to create jobs is with additional fiscal stimulus. But the skyrocketing federal debt gives financial markets and too many members of Congress jitters, and so stimulus is off the table. "The Obama administration is penned in by the need to avoid a bond and currency market revolt against giant budget deficits," writes FT's Krishna Guha. The lack of breathing room on the debt leaves us with only second-rate policies like an employment tax credit, which both Guha and the NYT's Paul Krugman can only halfheartedly endorse as an alternative.

Obama's trip to Asia this week is only likely to make him less inclined to engage in deficit-increasing stimulus. The Chinese government--America's biggest lender--will no doubt give the Leader of the Free World an earful about the dangers of excessive debt--just as it did when Treasury Secretary Geithner visited China this summer.

Amazingly, all we are now getting from the Obama administration on fighting unemployment is pure fluff: a "summit" on job creation. As University of Texas scholar Bruce Buchanan says in today's Washington Post, "Holding these summits is particularly tempting when there is relatively little of a substantive nature that a president can do about a particular problem. One of the ways you take the pressure off is to have a high-profile demonstration of the president's concern."

To make matters worse, economic policy may be taking a step backward in the Senate. To solve his health care financing headache, Majority Leader Harry Reid is giving a payroll tax hike on incomes over $250,000 a serious look. Don't get me wrong. I have no major quarrel with increasing taxes on the rich in times like these when the deficit is huge and there is a tremendous disparity in the distribution of income. But Reid should adopt the Senate Finance Committee's plan of taxing high-end employer-provided health plans. Because this tax on "Cadillac plans" would close a tax loophole and correct a market distortion, it would actually help economic growth (unlike Reid's rate increase that would hurt the economy). Union pressure on Democrats to kill the premium tax is enormous, but we are talking about sacrifice by those with some of the most extravagant health plans to pay for those who have none. Besides, Obama and the congressional Democrats really need to save the rate increase on income over $250,000 for next year when efforts on deficit reduction begin in earnest.

Sorry if all this makes you as miserable as I am about the current state of economic affairs. In today's Financial Times, W. Todd Roberson, a scholar at Indiana University, scathingly writes that: "the US government is completely without any comprehensive and forward-thinking national economic strategy." Perhaps that is too harsh. But not by much.

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