Put more money in consumers' pockets to boost recovery(Read article summary)
Businesses are hesitant to spend because consumers still aren't ready to buy. The US needs to boost demand, not supply.
Amy Sancetta / AP / File
â€śI am concerned about the fact that the recovery that weâ€™re on is not producing jobs as fast as I want it to happen,â€ť President Obama said Tuesday, amid the flood of bad economic news, including last Fridayâ€™s alarming jobs report.
Does this mean weâ€™re about to see a bold package of ideas from the White House for spurring growth of jobs and wages? Sadly, it doesnâ€™t seem so.
Obama says heâ€™s interested in exploring with Republicans extending some of the measures that were part of that tax-cut package â€śto make sure that we get this recovery up and running in a robust way.â€ť
Accordingly, the White House is mulling a temporary cut in the payroll taxes businesses pay on wages. White House advisors figure this may appeal to Republican lawmakers who have been discussing the same idea. It would, in essence, match the 2 percent reduction in employee contributions to payroll taxes this year, enacted as part of the deal to extend the Bush tax cuts.
Other ideas under consideration at the White House include a corporate tax cut, accompanied by the closing of some corporate tax loopholes.
Can we get real for a moment? Businesses donâ€™t need more financial incentives. Theyâ€™re already sitting on a vast cash horde estimated to be upwards of $1.6 trillion. Besides, large and middle-sized companies are having no difficulty getting loans at bargain-basement rates, courtesy of the Fed.
In consequence, businesses are already spending as much as they can justify economically. Almost two-thirds of the measly growth in the economy so far this year has come from businesses rebuilding their inventories. But without more consumer spending, businesses wonâ€™t spend more. A robust economy canâ€™t be built on inventory replacements.
The problem isnâ€™t on the supply side. Itâ€™s on the demand side. Businesses are reluctant to spend more and create more jobs because there arenâ€™t enough consumers out there able and willing to buy what businesses have to sell.
The reason consumers arenâ€™t buying is because consumersâ€™ paychecks are dropping, adjusted for inflation. And job losses are mounting. The 83,000 new private-sector jobs created in May represent a net loss because 125,000 jobs are needed merely to keep up with an expanding labor force. The number of Americans filing new claims for unemployment benefits edged higher last week.
At the same time, many Americans are falling behind in their mortgage payments. And housing prices continue to drop â€“ making homeowners feel even poorer.
Close to 60 percent of the half-trillion drop in household debt since the depth of recession has been defaults rather than repayments. This makes it harder for people whoâ€™d like to enter the housing market to get new mortgage loans, or for anyone to refinance. Other consumer debt burdens are rising. On Tuesday the Fed reported consumer credit outstanding rose in April â€“ mostly from record-high levels of student-loan debt and an up-tick in credit-card borrowing due to food and gas price increases outpacing wage gains.
All this translates into a continuing crisis on the demand side. Consumers canâ€™t and wonâ€™t buy more. Between January and March, sales grew just .15 percent around the country â€“ perilously close to no growth at all. May sales look even worse. Chain stores are reporting weaker sales. Consumer confidence has dropped sharply.
How to get jobs back, then? By reigniting demand. Put more money in consumersâ€™ pockets and help them renegotiate their mortgage loans.
For example: Enlarge the payroll tax break for workers â€” not just for employers. Exempt the first $20,000 of income from payroll taxes for a year. Create a WPA for the long-term unemployed. Allow distressed homeowners to declare bankruptcy on their primary residence, thereby giving them more clout with lenders to reorganize their mortgage loans. Lend federal money to (rather than bail out) states and cities that are now firing platoons of teachers, fire fighters, and other workers because state and local coffers are empty.
But weâ€™re not hearing any of these sorts of demand-side solutions from the White House. In seeking Republican votes, Obama is putting forth Republican supply-side ideas â€“ lowering the employer costs of hiring, cutting corporate taxes â€“ that have nothing to do with this demand-side crisis. He may attract some Republican votes for these, but whatâ€™s the point if theyâ€™re irrelevant to the real problem?
The Presidentâ€™s putative embrace of the false notion that businesses need more financial incentives in order to hire also risks giving legitimacy to other Republican supply-side nostrums being pushed by House Republicans and GOP presidential aspirants. On Tuesday, Tim Pawlenty called for lower taxes on corporations (down to 15 percent from the current 35 percent), and lower taxes on the rich (to 25 percent from the current 35). Newt Gingirch wants to lower corperate income taxes to 12.5 percent and eliminate the estate tax altogether. And so on.
Better that the President advance ideas that work, and go to battle over them.
Supply-side economics doesnâ€™t work. Itâ€™s been tried for thirty years, to no avail. And now, when our continuing economic crisis is so palpably being driven by inadequate demand, itâ€™s bogus than ever.
The last thing we need is for the President to go over to the supply side.
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