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:

  1. A series of poli­cies aimed at small busi­nesses to encour­age them to grow
  2. A pile of tra­di­tional gov­ern­ment spend­ing, some bet­ter than others
  3. A few poli­cies tar­geted at the unemployed
  4. 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.

Depre­ci­a­tion Bonus

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?