Tag Archives: economic recovery

Making Sense of Obama’s Tax Compromise

Marc Seltzer © 2010

By Marc Seltzer; originally published at care2.com on December 8, 2010.

. . .

The Obama compromise, which renews existing tax rates for middle class and wealthy Americans and continues tax incentives aimed at speeding economic recovery is not as simple as it seems.

At first it appears that the President allowed wealthy Americans, who have done exceedingly well in the past decade and generally survived the economic crisis with losses, but not foreclosures or unemployment, to win a battle in class warfare.  It is true that letting the Bush tax cuts (for Americans earning more than $250,000) expire would have forced the wealthy to contribute significantly more to the public budget when high unemployment and underemployment were causing a great deal of stress and suffering to middle and lower class workers. In a simple contest over redistribution of wealth, wealth won.

In the larger context, the President’s compromise may have been a significant achievement.  The President is working to stimulate the economy to speed economic recovery.  The best way that he could have done this without continuing tax cuts for upper incomes would have been to let those tax cuts expire and separately to provide a major new stimulus to the economy.  This could have taken the form of a half-trillion dollar infrastructure program or multi-year green-energy committment to make American energy consumption more efficient and take a leadership role (now held by China) in developing green-energy technology.  However, there was not enough support in Congress, let alone the public at large, for such a major new stimulus program.

Without new stimulus spending, the higher tax rates, as Bush tax cuts expired, would have taken money out of the private economy.  This money would go as tax revenue to pay down the deficit, but would not create new public spending or jobs without additional stimulus legislation.

This is the real problem.  The economic recovery is not yet fast enough or strong enough to endure, without harm, tax hikes, absent a corresponding increase in stimulus from another source.  Yet no other stimulus was politically available.

This put the President in the position of having to accept a renewal of all the Bush tax cuts, to keep the economy from losing steam, at least while the economic recovery was weak.  The two-year tax-cut extension was the estimate of that vulnerable window of time.

Importantly, the high-income tax cuts were not the whole deal, they were only the Republicans’ bargaining chip.  As David Leonhardt reports in the New York Times, the President got unemployment benefits extended, a cut in the payroll tax and some business taxes and college tuition tax credits in addition to continuing the lower tax rates for middle income earners.  The President’s package amounts to significant new stimulus over and above continuing the Bush tax rates.  Economists like Paul Krugman and Christina Romer have said, since the financial crisis, that more stimulus was needed to keep the economy growing and to support employment.  The fight in Congress and in the general public has been about how much to spend on stimulus, in light of the deficit and the Republican preference for free-market solutions and lower stimulus spending.

Seen in this light, the President was able to provide significant governmental support for economic and job growth, at the cost of lower tax rates for the wealthiest two percent of Americans than was the President’s preference.  The President ran for office asserting that wealthy Americans should pay a greater share of the nation’s tax burden to insure that all Americans could afford health care and the continuance of social safety-net programs.  However, the economy was not yet in crisis, the unemployment rate not near 10%.  In the current circumstances, the President must focus first on supporting the economy with stimulus and spending, even in the face of the deficit and his stated belief that wealthy Americans should, in the long term, contribute more.

As the growth rate improves, and unemployment comes down, it will be appropriate to cut spending and raise taxes to balance the budget and make decisions about fair contributions from different income earners in society.  For those that believe in a more progressive income tax with higher earners paying more than the historically low levels they pay today, the real fight will be in two years’ time, when the economy is stronger, and the primary consideration of a tax hike on the affluent will be social justice and the great disparity in incomes between rich and poor, rather than the impact on the overall economy.

Economists will still argue about how much impact tax hikes on wealthy Americans will have on the wider economy and politicians will continue to argue about the social justice goals of a progressive tax system, but the context should be quite different.  Hopefully, substantially more of the millions of unemployed Americans will be back at work and the growth rate will have continued to improve.

UPDATE DECEMBER 11, 2010:  Bill Clinton discusses tax compromise

Marc Seltzer is also a contributor to SupremePodcast.com, a weekly U.S. Supreme Court case review podcast.

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Questioning Conventional Wisdom — “Jobless Recovery”

By Marc Seltzer; originally published January 6, 2010

Don’t be too sure

. .

“Jobless Recovery”

No adjective characterizes political and media discussions of the recovery from the 2008 recession more than the word “jobless.”

Is it true?  Have the stars aligned to deny us a bright future?  Should we be worried?

LIBERAL EXPRESSIONS OF CONCERN

One way to evaluate what people are saying is to look at their motivation.  In this case, liberals and conservatives are both motivated to characterize the job prospects as worse than they likely are.  Many liberals, such as outspoken Nobel Laureate Economist Paul Krugman, want the government to take action in support of job creation so they focus on the high unemployment rate.  Ten percent is certainly higher than a more ideal 5 or 6 percent that would be a healthy level for the economy, if it were not in either an excessive boom or bust cycle.  But the current high unemployment reflects the depth of the recession, not a “jobless” recovery.

In 2009, the growth rate only turned positive in the third quarter.  Jobs are a lagging indicator and always follow the business turn-around and improvement in growth rate by many months.

Thus, the 2009 recovery is not “jobless” because unemployment has not yet come down.  Every recession involves the loss of jobs and every recovery involves the improvement in business conditions and higher growth rate long before jobs return.

Professor Krugman is worried about a weak recovery and thus wants to see additional stimulus aimed at creating jobs.  He is particularly concerned that the slow return of jobs creates great suffering and harms employment prospects for the long-term unemployed.  His proposals could help alleviate high unemployment and move the economy more quickly towards full employment, but they do not indicate that this is a jobless recovery whereas other recoveries were not.  Rather they reflect the fact that the severity of the recession led to millions of layoffs and that it will take time for millions of workers to be rehired into the labor market.

HOW ABOUT THOSE REPUBLICANS?

On the other side of the isle, the Republicans are constantly saying that the Obama administration actions such as stimulus spending and health care reform are bad for the economy and that we are headed for a jobless recovery.  However, it serves the Republican political goals if the Obama administration can be described as failing to lead an economy out of recession.  Millions of people are unemployed and many who are employed face job insecurity.  The Republicans exploit this to political advantage by claiming that current policies are wrong and pointing to a “jobless” recovery as evidence of failure.  The Republicans will continue to have every incentive to claim that Democratic policies are causing a jobless recovery until the 2010 elections.

But that doesn’t make it so.  Remember that it is far quicker to lay off employees than it is to rehire them.  Layoffs can be done by thousands on a single day, while rehiring takes substantial human resource department efforts, paperwork and staffing in itself.  Unless employees were simply furloughed, a thousand employees laid off in a single afternoon could take months to rehire in ordinary conditions.  For this reason, and because the recession of 2007-2008 involved a spectacular financial crisis with fast and deep layoffs, reaching a peak 750,000 a month in January of 2009, unemployment may only decrease by 750,000 to two million new jobs a year in coming years.  Remember, we lost more than seven million jobs.

Nonetheless, six to eighteen months after the growth rate becomes strong, we should expect to see substantial gains in employment.  It will be correct to say during the recovery that jobs are not created as fast as they were lost, but that is a hardly the standard for a “jobless” recovery.  The real key is the growth rate.  It reached more than 2% in the third quarter of 2008.  Six months from now it should be higher still.   The activity is reflected in increased hours and temp job hires for now, but inevitably job creation will follow.

The real question is whether innovative action in the public and private sector can increase the speed of job creation without distorting the marketplace and creating waste.  Nations such as Germany subsidized jobs during the crisis to limit layoffs.  Many nations, including ours, supported public and private sectors with stimulus spending, preventing layoffs from getting worse than they did.  Now, the question is whether means will be found to efficiently return to higher employment more quickly than in other deep recessions.

May 6, 2010 UPDATE:  Recent jobs data finally confirming predictions:  Denver Post