“American Jobs Act” is Misguided

Last week, President Obama revealed his plan to get Americans working again.  They named it the “American Jobs Act”.  A lot of what’s in it is pretty good stuff to help with the recession.  You can read about it here.  However there is one problem with it.  At the end of the rundown, I came across this:

Fully Paid for as Part of the President’s Long-Term Deficit Reduction Plan. 

  • To ensure that the American Jobs Act is fully paid for, the President will call on the Joint Committee to come up with additional deficit reduction necessary to pay for the Act and still meet its deficit target. The President will, in the coming days, release a detailed plan that will show how we can do that while achieving the additional deficit reduction necessary to meet the President’s broader goal of stabilizing our debt as a share of the economy.

Well, this was almost a good idea.  The biggest thing wrong with it is that it offsets tax cuts with spending cuts and offsets spending increases with tax increases. All that means is that, at best, some money might be better spent or spent more of due a spending multiplier effect, but overall, it isn’t going to do much to increase overall demand in the economy.

Our current recession is being caused by a lack of Demand in the economy. People aren’t spending money, and businesses aren’t making new investments. Instead, households that are employed are saving in case of job loss, households that lost their job aren’t spending because they have little to no income, and businesses are saving money because they see no profitable investments. The only way the economy will recover is when household start spending and businesses start investing. If taxes are raised, more money will be taken out of the economy, more people will be unemployed, more people will save out of fear of losing their jobs, and businesses will see even fewer profitable investments.

If the president, or anyone else in Washington wanted to get serious about ending the recession and high unemployment, they should listen to the advice of Warren Mosler.

My first proposal is for a full payroll tax suspension. That means no FICA taxes will be taken from both employees and employers. These taxes are punishing, regressive taxes that no progressive should ever support. The Tea Party, of course, is against any tax. So I expect full bipartisan support on this proposal. Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living.This is big money, not just a few pennies as in previous measures.

[snip]

My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments on a per capita basis with no strings attached. This will help the states to fill the financial hole created by the recession, and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday restores their lost revenues.

[snip]

My third proposal does not involve a lot of money, but it’s critical for the kind of recovery that fits our common vision of America. My third proposal is for a federally funded $8/hr transition job for anyone willing and able to work, to help the transition from unemployment to private sector employment. The problem is employers don’t like to hire the unemployed, and especially the long term unemployed. While at the same time, with the payroll tax holiday and the revenue distribution to the states, business is going to need to hire all the people it can get.The federally funded transition job allows the unemployed to get a transition job,and show that they are willing and able to go to work every day, which makes them good candidates for graduation to private sector employment.

The problem of the recession can be solved. Rather easily too, once you understand the monetary system. The amount of harm the recession is causing our country is astronomical. Fixing the recession should be priority number one.  It should especially be before worrying about self-imposed budget constraints like the debt ceiling.

How the 2009 Federal Budget Could Have Been Balanced.

Our government collected fewer taxes in FY2009 than it did in FY2000 – this can be said without adjusting for inflation. In 2000, the government took in 1.54 trillion dollars in on-budget taxes, but only took in 1.53 trillion in 2009.  This is despite spending twice as much money in 2009 than in 2000.   Tax receipts during the 90s grew fast.  That was partly do to higher taxes and also with a phenomenal increases in GDP and wealth.  Then came the 2000s.  Tax receipts languished from lower taxes, a recession, more tax cuts, another recession, a slow recovery, and then the Great Recession.  So as an academic exercise, let’s see where the budget deficit would be if tax revenue had grown instead of diminished during the 2000s.  You can see how revenue has slowly, but steadily, gone up during the 80s and 90s, but then went sideways during the 2000s.  I included the raw numbers, plus numbers that adjust for inflation.

recent_on-budget_receipts
(Click chart for larger image.  Click here for the numbers)

I always read some pundits claiming that the Clinton-era tax and GDP growth was unsustainable(see here for example).  Therefore, I calculated the tax revenue increases of 1993-2000.  The average growth was 8.78%.  However, since I’m adjusting for inflation now, I adjusted everything to 2009 dollars.  This yielded average growth of 6.01% in tax revenue from 1993 to 2000.  However, since people accuse that being unsustainable and unrealistic, I decided to chart out the slowest growth in tax revenue from the Clinton Era.  It was 5.9% if using non-adjusted numbers and 3.61% if using adjusted numbers.  Here’s what revenue would’ve been like if the 2000s had averaged the slowest rate of the 90s.

if_on-budget_receipts_growth_had_continued
(Click chart for larger image.  Click here for the numbers)

Whether or not you adjust for inflation, it would’ve put on-budget revenue at approx 2.6 trillion$ in 2009 and 2.74 trillion in 2010.  What that means is that the on-budget deficit would’ve only been 400$ billion dollars in 2009 if our spending patterns had been exactly the same.   However, if you strip out all the spending that was done because of the great recession, but keeping stimulus spending, that would’ve been 397$ billion in spending cut.  The 2009 budget could’ve been balanced if revenue had grown at the slowest rate it grew in the Clinton Era, and there had been no Great Recession.  No other adjustments necessary.

Now let’s explore another scenario.  Let’s say that tax revenue had grown even slower than the slowest rate it did during Clinton’s presidency.  I decided to take a look at what the average growth rate for tax revenue has been since 1962.  When adjusting for inflation, the average growth rate from 1962-2000 was 3.16%.  However, if you exclude the Clinton era completely it’s even lower.  From 1962-1992, the average growth rate was 2.4%.  You can see my raw numbers and other statistics here.  I added to the graph what would’ve happened if the 2000s had maintained revenue growth in accordance to the historical averages.  This time I only included the adjust for inflation numbers.

if_historical_receipts_increase
(Click chart for larger image.  Click here for the numbers)

If 63-2000 average tax revenue increases had occurred in the 2000s, the 2009 revenue would’ve been about 2.55 trillion.  That means the 2009 budget would’ve only had a 50$ billion dollar deficit once you take away the Great Recession spending.  That probably would’ve been easily covered if you eliminated the 2009 stimulus spending.

If 63-1992 average tax revenue increases had occurred in the 200s, the 2009 revenue would’ve been about $2.38 trillion.  That would mean that the 2009 budget would have to have been about 620 billion dollars lighter.  If, once again, we assume no Great Recession and remove $400 billion, that still leaves 220$ billion to cut from spending.  Not an easy task, but much less daunting than the 1,500 billion dollars we actually had because of sideways revenue.

If there had been no recession, where would you cut that 220$ billion from the 2009 budget?  Remember – I already removed the direct costs of the recession(and only those costs).

Banks come first, then the poor, then maybe the economy

As I mentioned before the giant increase in the 2009 budget deficit that everybody is acting so freaked out about was  caused by a 400$  billion loss in tax revenue as well as an almost 562$ billion increase  in outlays.  Where did all that money go?  A lot of that extra spending was made directly as a result of the Great Recession.  Of the 562$ billion extra spending, 397$ billion of it was a direct result of the recession and  most of that was just bailing out the banks.  Here’s how I arrived at these numbers.

The 397$ billion doesn’t include money meant to stimulate the economy.  I included all the money spent to bailout the banks as well as unemployment and increases in domestic spending on the poor.    While I didn’t include most stimulus money, however, I did include unemployment and other income security programs that may have been extended as part of the American Recovery and Reinvestment Act.

So here’s how it all broke down(The individual accounts can be found here):  (Numbers are in millions of dollars)

  1. TARP – 151252
  2. GSE Bailout(FannieFreddie) – 86830
  3. FDICNCUA – 3813
  4. First time buyer Mortgage Credit – 9386
  5. Medicaid – 49498
  6. Unemployment – 77545
  7. Food and Nutrition – 18407

I know I’ve talked about the spending increases in2009 before and  already graphed the biggest increases.  This time I wanted to break down the spending a little differently to demonstrate a couple different points.  First, the graph:

2009 Spending Increases
(Click on the Chart of a larger view)

So two points.  First of all, after adding up TARP, the GSE bailouts, and the increase in Deposit insurance it adds up to be more than the increased costs of Unemployment, Food and Nutrition(food for the poor), and Medicaid.  So that means of that extra 562$ billion that our government spent in 2009, significantly more of it went to help the bankers and “investors”-the ones that helped get us into this mess, than those that are now poor or unemployed because of the recession.  That’s messed up!

Now to the second point.  Look how little actual stimulus spending actually occurred in 2009 over 2008.  Once you take out all the spending to bail out the banks and the money that’s meant to keep people afloat, that only leaves 165$ billion left in the budget plus another 9.3$ billion for the housing credit.  That’s assuming all of it when to stimulus spending and not just natural increase of government cost.   That remaining money was spread out amongst various departments and block grants to states and local governments.  I’m not sure how that bit of money was meant to jump start a 14 trillion dollar economy that is in it’s worse recession in over 70 years.  I think I’m starting to understand why the recovery is starting to sputter and why so many people are calling for a “jobs bill.”  The first stimulus just wasn’t enough.

Vice President Joe Biden once said in a debate, “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”  If that is true here’s what our government valued in 2009:

  1. Rescue the Bankers and investors.
  2. Help the Unemployedpoor barely get by
  3. Stimulate the Economy

I don’t know about you, but that’s perverse values.  Hopefully Fiscal Year 2010 will look a bit better.