A little over a week ago, President Obama announced to Congress and the nation a proposed bill, called the American Jobs Act. He described it at a high level, but I thought it would be worth reading the text itself to see what’s in there.
Today, I’ll share with you what I saw. Not everything in the bill is discussed here; there are a couple of provisions that should have minimal impact on anything, and so I left them out in the interest of brevity.
So, what’s in the AJA? There are four main parts:
- A series of policies aimed at small businesses to encourage them to grow
- A pile of traditional government spending, some better than others
- A few policies targeted at the unemployed
- Some tax changes intended to cover the increased spending and decreased taxes that arise from the above parts
Let’s look at these in turn.
Small Business Policies
These consist mostly of small business tax cuts, plus one valuable loan guarantee extension. The projected cost, almost entirely through reduced tax levies, is $245 billion.
Payroll Tax Cut
This is pretty minor in terms of the economy as a whole. Basically, it cuts payroll taxes in half for one year. It’s hard for me to see how this directly moves the unemployment needle. It does, however, result in $170 billion in additional money in people’s pockets (at the expense of the OASDI Trust Fund), which is likely to increase purchases by a bit.
Overall, this is pretty untargeted, but likely to have a positive impact on the overall short-term economy, relative to the status quo.
Tax Credit for Increased Payroll
This one’s really minor. It eliminates, for one year, the payroll taxes on new hires, which may have an impact on marginal hiring decisions. This can be expected to slightly increase employment, but we’re talking something on the order of a tenth of a point or so, again at the expense of the OASDI Trust Fund.
What we have here is encouragement for businesses to invest in capital. We’ve had this in place for a year already, so it’s clearly not pushing all of those companies that have been sitting on cash to spend it on stuff. It’s hard to expect this to change absent a change in the incentives.
Surety Bond Expansion
Now we’re talking. The Federal Government has long had a program to cover the default risk of startup businesses, as a means of encouraging rapid innovation, a longstanding American strength in business. But the amount of money that can be covered hasn’t changed in some time. This raises the cap, allowing for entire new classes of businesses to start up. The startup arena is typically where the greatest growth occurs when the economy exits recessions, so this is a good place to focus attention.
Withholding Delay for Government Contractors
It has always seemed to me to be counterproductive for government to pay contractors and then charge taxes on the transaction. But this really doesn’t have much to do with the overall economy. It should simply reduce the amount of paperwork and such, which would marginally improve the efficiency of converting government dollars into finished product.
But as far as I’m concerned, this should be permanent.
Veteran Hiring Preferences
I don’t mind encouraging businesses to hire veterans. I just don’t think it belongs in a bill that is designed to get more Americans hired, rather than simply encouraging veterans to be hired instead of other Americans. The impact on unemployment should be close to zero.
Here we have a $140 billion laundry list that sounds like the ones we used to hear from President Bill Clinton in his State of the Union addresses. $30 billion to pay for public school teacher salaries, $25 billion for school facility infrastructure improvements (both public and private schools), $5 billion for police and fire departments, $44 billion for transportation infrastructure…
There’s nothing wrong with any of the places the money is going, per se. But aside from the transportation infrastructure, we’re really talking about spending money on maintaining the status quo for state and local government functions. This continues a disturbing trend over the past several decades of state and local governments spending more of their money on these nonessential services, counting on the federal level to cover the essentials. And this results in less predictability of funding, since control shifts to 533 members of Congress who do not represent the municipalities.
Will fewer teachers be laid off with this money? Or will localities continue to do as they have done for many years, and lay off the same number, but shift the local funds elsewhere? This just doesn’t seem to be as targeted or valuable in practice as it is in theory.
There is an interesting nugget in here, though: a proposed Project Rebuild, which allocates $15 billion in funds to take existing housing abandoned due to the real estate crash, fix it up (abandoned housing falls into serious disrepair very quickly), and make it available to low-income families. It seems to be a good use of funds, providing a big bang for few bucks by keeping real estate values from falling further in neighborhoods with increasing blight.
Policies for the Unemployed
Some of these are obvious, some more innovative.
Unemployment Insurance Extension
This is straightforward. It’s the same sort of extension as all of the others that have come before. It helps avoid triggering a retail drop, which would otherwise threaten to bring about a retail death spiral of spending reductions and layoffs.
That said, these extensions only appear during times of high, persistent unemployment. I’d far prefer that these unemployment insurance payments be tied to some form of community service work. We all benefit under those circumstances.
Retraining and Apprenticeship Subsidies
These have been around for a while in various forms. There’s $9 billion allocated to these. I’m a fan of these types of programs, because they tend to have better returns on investment than many other options.
Tax Credit for Hiring Long-Term Unemployed
This is an interesting proposal. It doesn’t do much for the overall unemployment numbers, and certainly nothing more than we would get from a less targeted tax credit. There’s nothing in the credit to prevent an employer from firing someone and immediately hiring someone else in order to take advantage of this credit.
On the other hand, except for the least-skilled positions with high turnover, the likelihood of an employer building such a revolving door is low, simply because of the inherent expense associated with training new employees.
Anti-Discrimination of the Unemployed
On its face, this is a nice thing. Employers are prohibited from overtly excluding the unemployed from being considered for a job. But in practice, this will turn into the model of “Don’t be obvious about it.” The discrimination will almost certainly continue.
How to Pay for It
There are four tax changes that are proposed to cover the costs associated with all of the above.
Charity Deduction Cap
This changes the cap on effective tax credits for charity from 35% to 28%. Past changes of the sort haven’t had a significant impact on the amount of money donated to charity, so the upshot of this change should be a pretty straightforward increase in tax revenues.
Hedge Fund Income Recast
Here’s a rather complex tax code change in detail. In essence, it changes the treatment of hedge fund shares from capital gains (capped at a 20% tax rate) to ordinary income (capped at 35%). It’s hard to tell what the impact would be on actual tax revenues, since it will probably push a significant amount of money out of these funds and into other investment vehicles.
Corporate Jet Depreciation Change
This is less about increasing taxes and more about addressing a situation that smacks of gifts to the wealthy. That said, it should generate some additional tax revenue and thus offset some of the other costs.
Oil and Gas Subsidy Cuts
This, too, is less about increasing taxes. In this case, it’s intended to “punish” the oil companies for having such large profits. That said, their profits have been significant of late, and the overall market forces associated with relatively high oil prices renders these subsidies far less significant than they would have been in years past. It’s time for these to go.
How Good is The Bill?
Laws are never perfect, and I do have a few objections to this proposal.
The payroll tax break is not an especially efficient way to get money into the economy. It’s here mostly because it was popular last time, and so it makes the overall bill easier to sell. In other words, it’s partly a marketing expense.
Other than the loan guarantees, the small-business elements don’t feel like they will have much of an impact. Low cost, low benefit is the order of the day there.
The spending on state and local employees incorporates no protection against the funds being “laundered” and repurposed.
The unemployment insurance extension doesn’t have a community service component attached to it. This is leaving “free” labor on the table, labor which can benefit the entire nation.
The corporate jet and oil company tax changes are more for show than for revenue. They should both be done, but the intent is pretty clear.
This proposed law, though, is better than most. It’s relatively short, very straightforward, and mostly well targeted. I like it better than the ARRA, to which I had far more objections.
Coming soon, I’ll have a similar analysis of Mitt Romney’s proposal, which was published at about the same time.
In the meantime, what do you think of the proposal? What do you like about it? What do you dislike? Why?
- Obama’s Jobs Plan Paid For? Seems Not (brandtstandard.com)
- Obama’s Jobs Speech — Posner (becker-posner-blog.com)
- Parsing Obama’s Jobs Bill (npr.org)
- Obama: Congress has no reason to wait on jobs bill (thegrio.com)
- The “Jobs” Speech: Aftermath (skydancingblog.com)
- Obama Calls for $447Bln Job Plan,Pledges Ambitious Deficit Pkg (forexlive.com)
- Obama’s 17 tax breaks for small business: Big whoop! (money.cnn.com)
- Mulligan: Obama’s Jobs Act Contains Job-Creating, Job-Destroying Proposals (taxprof.typepad.com)
- Tax credits, cuts and write-offs: How the jobs plan could help startups (medcitynews.com)