Obama’s American Jobs Act Spends More for Economic Recovery, Perpetuates Keynesian Myth

President Obama delivered his jobs speech this evening, which focused on job creation via tax breaks for small businesses, cuts in payroll taxes, and more infrastructure projects.  This is the usual rhetoric coming out of Washington and many will liken it simply to a last-ditch effort of the White House to improve polling numbers going into the campaign season.  But we should not focus on such drivel.  Rather what should be noted is that only one month after averting a U.S. sovereign default and seeing our credit rating downgraded for the first time in nearly a century, stimulus spending in the name of economic recovery has not left Washington, as it is at the heart of this legislation.  President Obama stated:

The purpose of the American Jobs Act is simple: to put more people back to work and more money in the pockets of those who are working. It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for the long-term unemployed. It will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services. You should pass this jobs plan right away.

via Google Images

Wow!  I am so glad we learned our lesson about unrestrained spending and fiscal prudence.  Oh wait, President Obama also stated that every piece of this legislation is paid for.  But this depends not on dollars we currently have saved in some bunker beneath the White House or the U.S. Treasury.  The money that will pay for the American Jobs Act is that which has yet to be saved.  Recall the Budget Control Act passed last month to avert a default on U.S. credit.  It called for nearly $1 trillion in immediate cuts, but the term “immediately” in Washington-speak actually means spread out over the next ten years.  So we are to pay for this legislation, much of it with immediate costs, with spending cuts that will be enacted under a different Congress and Executive? Really?  But wait, there is also the additional $1.5 trillion in spending cuts to be determined by our beloved “Super Congress” before the end of the year.  But the likelihood that such cuts will see the balance sheet within the Obama administration, or even the next, is not likely.

Here are some more reasons why Congress should pass yet another Keynesian policy, despite the utter failure of its predecessors.

  • Pass this jobs bill, and starting tomorrow, small businesses will get a tax cut if they hire new workers or raise workers’ wages.
  • Pass this jobs bill, and all small business owners will also see their payroll taxes cut in half next year.
  • Pass this jobs bill, and thousands of teachers in every state will go back to work.
  • Pass this jobs bill, and companies will get extra tax credits if they hire America’s veterans.
  • Pass this jobs bill, and companies will get a $4,000 tax credit if they hire anyone who has spent more than six months looking for a job.
  • Pass this jobs bill, and the typical working family will get a fifteen hundred dollar tax cut next year.

The bottom line is this.  Our government continues to spend and propose additional spending in the name of economic recovery with little results and an empty wallet to boot.  The results at this point are certain.  Any recovery proposed by Washington policy hounds or the President will fail because two things must happen for a recovery: (1) decreased government spending, and (2) increased spending in the private sector to fuel consumption.  Yet, our government is stuck in the ideological misnomer of Keynesian stimulus spending.  Consequently, they seek to accomplish private sector growth by crowding our private sector markets.  It is an economical contradiction and illuminates the lunacy of Washington politics.

The best policy that could come out of Washington at this point is no policy at all.  But that is not the take of our beloved President.  He made his ideological stance on the government’s role in the free market quite clear.  “As I’ve argued since I ran for this office, we have to look beyond the immediate crisis and start building an economy that lasts into the future – an economy that creates good, middle-class jobs that pay well and offer security.”  By “we” he does not mean the American people, but Congress and the Executive.  Despite the rhetoric of Washington politics looking to and “representing” the people, their record demonstrates actions often to the contrary.  So one must conclude from this statement that the intent is not to let the markets recover on their own, but to continue crowding out any chance at a recovery now and in the near to mid future.  The only substantive impact of increased spending now is increased taxes later, but without an economy to raise wages enough to offset such tax increases we will all see a real decline in living standards.  Welcome to the new America!

Related Posts

Gold, The Only Objective Standard of Value

via Google Images

The following is a seminal passage from Ayn Rand’s Atlas Shrugged.  As Francisco explains the importance of money as the only moral base for man’s existence, he highlights an inevitable fact we would all do well to recognize from current trends resulting from both fiscal and monetary policy coming out of Washington and the Federal Reserve respectively – the declining value of our fiat money.

“Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence.  Destroyers seize gold and leave to its owners a counterfeit pile of paper.  This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values.  Gold was an objective value, an equivalent of wealth produced.  Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it.  Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtues of the victims.  Watch for the day when it bounces, marked: ‘account-overdrawn’.”

Atlas Shrugged, 383-84

The “legal looters,” are of course those in Washington, and yes, I mean to include everyone because if you are not part of the solution, then you must by logical necessity be part of the problem.  The account “which is not theirs” is of course that of the taxpayer.  S&P’s recent downgrade of U.S. credit is evidence that the “day when it bounces, marked: ‘account-overdrawn'” is not so far off.  Also interesting to note is that gold recently topped $1800 per ounce following S&P’s announcement and a highly volatile market here at home and overseas.  It only makes good sense that the value of gold would climb as the value of the world’s reserve currency no longer commands the highest credit rating.

Related Posts:

Congress and President Ignore Warning from S&P, Pass Meaningless Debt Package Anyway

via Google Images

On 14 July, Standard & Poor’s explicitly warned Washington that passage of meaningless legislation would likely result in a sovereign downgrade.

From a creditworthiness perspective, we believe that failure to formulate a fiscal consolidation plan, even if the president and Congress were to agree to raise the debt ceiling in time to avert a potential default, would be materially less optimal than hypothetical scenario 1. Such a partial solution would essentially put before American voters in the 2012 presidential and congressional election the spending vs. revenue debate. Meanwhile, debt would continue to mount and the results of the election might not, in any event, resolve the issue.

Under this scenario, we might lower the U.S. sovereign rating to ‘AA+/A-1+’ with a negative outlook within three months and potentially as soon as early August.

Agreement on raising the debt ceiling without making any tough budget decisions would not be shocking, in our view, given the number of times Congress has done so in the past.

So Washington was warned and Washington ignored said warning.  The budget package failed to cut the minimum $4 trillion S&P felt was needed to begin getting our fiscal house in order.  Essentially, the Budget Control Act is meaningless.  It makes only $917 billion in cuts (but over the next ten years) and leaves an additional $1.5 trillion in cuts to be determined by an ad hoc bipartisan committee with far too much power.

My Related Posts:

S&P Downgrades U.S. Credit Rating to AA+ Amidst Shambled Debt Deal

via Google Images

Today’s market news can be summed up in one announcement.  Standard and Poor’s downgraded the U.S. credit rating.  The U.S. has lost its perfect credit score for the first time in over a century.  In response to the butchered debt deal signed into law on August 2, S&P issued a credit downgrade for the U.S. from AAA to AA+. The following are only key excerpts from the press release, the full text of which can be found here. S&P Downgrade of US Credit Rating (5 Aug.)

My contention is that the S&P downgrade is illustrative of the diminishing stability of the U.S. legislative process.  Consequently,  I have included key excerpts that highlight the degradation of the political establishment and its inability to legislate substantive policy due to an increasing divide between Parties.  While there is much more to discuss in the press release regarding the fiscal issues at hand, I find it critical to highlight the inability of the political establishment to perform its most basic functions.

Overview

We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

The debt deal, officially known as the Budget Control Act, only cuts $917 billion over the next ten years with cuts yet to be determined of up to $1.5 trillion.  S&P feels that cuts of $4 trillion are needed to start with in order to “stabilize the government’s medium-term debt dynamics”  In other words, the U.S. needs to reduce spending by at least $4 trillion now in order to keep its books from bursting into flames.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011. 

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

The short interpretation is that markets are beginning to feel the heavy hand of a highly dysfunctional U.S. government, prevalent in both its policies and its partisan bickering.  The differences between the Republican and Democratic parties are so great as to cast a shadow over the viability of an economic recovery and the solvency of the U.S. government.

Rationale

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the 
growth in public spending, especially on entitlements, or on reaching an  agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

The fact that our political establishment is becoming increasingly unstable – opposing parties residing at opposite ends of a lengthening political and ideological spectrum – sends signals that any policy reconciliations over government spending and programs such as entitlements (Social Security, Medicare, Medicaid) are not likely.  Moreover, the fact that Party politics resulted in using the threat of a default as a “bargaining chip” attests to the instability and recklessness of the American political establishment. Consequently, the hope of the U.S. government reaching a meaningful and lasting consensus of spending reduction is greatly diminished.

In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth… 

The political grandstanding and chicanery that has come to define Washington politics over recent decades damages confidence within the markets that any mutual agreement on reducing spending will be reached.

The Outlook

We view the act’s [Budget Control Act] measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future.

The structure of the Budget Control Act renders any solution to government insolvency largely to be determined.  The act does very little.  This reflects the typical legislative process in controversial matters, whereby the government passes legislation that seems to do a lot, just not right now.  The fact that some of the cuts occur over the next ten years, with the remainder yet to be determined suggests that political division has rendered substantive policy implementation untenable.  In short, our government is fragmented and has become legislatively inept, thus incapable of reaching consensus on important policy matters.

Related Posts:

%d bloggers like this: