Barack Obama sends his American Jobs Act to Congress today. Supporters are thrilled that the president is taking his fight to the people. Even many skeptics are saying that at least Obama is offering a first step, while acknowledging that the plan is not enough.
Unfortunately, the facts are more prosaic. Obama's proposals are simply the same as since the start of 2009: temporary tax cuts (half the new program) and temporary spending increases. These policies are not effective.
The theory behind Obama's policies is Keynesian: that a temporary package of tax cuts and spending increases can provide a short-term boost while the economy returns to self-sustaining growth. Many economists agree with this logic, but the underlying economic theory is much weaker than supporters realize. It fails on two counts.
First, the US economy needs more than a temporary stimulus to return to self-sustaining growth and full employment. Our growth and employment problems are structural, and need a structural response. Second, the stimulus might not actually stimulate very much even in the short term.
Obama's economic strategy assumes that the U.S. economy has a strong natural tendency in the medium term (say three to five years) to bounce back from the 2008 recession with renewed growth. The interpretation is that demand for new homes has temporarily declined as a result of the bursting of the housing bubble and the bankruptcy of Lehman Brothers, but that private demand will quickly recover, especially if jolted by a temporary stimulus. Yet the problem in the US is deeper. The collapse of housing is actually a symptom rather than the fundamental source of US economic weakness.
The structural problem is that America has lost its international competitiveness in basic industries including textiles, apparel, and several other areas of manufacturing. The production jobs are now in China, India, and elsewhere, where wages are much lower while productivity is more or less comparable to the US (and where production often involves US companies, using US technologies, producing overseas and re-exporting to the US market). Only US college grads can resist the international competitive pressures; high-school grads have found the labor market fall out from beneath their feet.
The housing boom between 1998 and 2008 was an indirect reaction to the loss of manufacturing. As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.
Obama and his advisors have believed, in effect, that they can reignite the housing boom. Rather than reacting to the underlying problem -- the loss of manufacturing competitiveness -- they have acted as if a bit of pump priming and the passage of time will recreate consumer-led growth in housing, autos, and other sectors.
Yet this approach has been doomed to fail, and continues to do so. Consumers will not return quickly to buying houses, cars, and other big-ticket items in large numbers. They are exhausted and in debt, and in no mood to repeat the earlier disasters of over-borrowing.
The other mistake has been the White House's confidence that stimulus works reliably and predictably to raise employment and output. Yes, many economists outside of the White House also share this faith, even though the evidence for a stable "multiplier" linking tax cuts or spending increases with higher employment is very weak. Because households and firms view the tax cuts as temporary, knowing that the government will have to reverse them in order to close the budget deficit, they are prone to use the tax cuts to pay down debts ("deleverage") rather than to engage in new spending or hiring.
One of the common errors of our recent policy debate has been the belief that various studies of the Congressional Budget Office (CBO) "prove" that the stimulus measures have raised employment and output. Careful readers of the CBO reports know that the CBO has proved nothing of the sort. The CBO reports have assumed that the stimulus works, relying on multipliers found in its mathematical models of the US economy. The CBO hasn't in fact re-examined its model for purposes of estimating the impacts of the stimulus policies.
Yet the actual outcomes of the US economy have been far worse than were expected. Unemployment, of course, remains above 9 percent when it was expected in early 2009 to fall to below 7 percent by today. There is, alas, no reason to believe that the stimulus packages have done much of anything to stimulate the economy even in the short term, much less to bridge the gap to the revival of sustained growth.
There is an even deeper reason for the public's disorientation over Obama's rhetoric. President Obama repeatedly and rightly discusses the longer-term prerequisites for restoring competitiveness: investments in infrastructure, renewable energy, job training, and quality education. Yet these alluring long-term visions are almost completely disconnected from Obama's actual budget policies, which are relentlessly short-term and without strategies beyond a year or two. This disconnect between Obama's soaring rhetoric and lack of long-term plans was on display in the jobs speech this week.
Obama is right that the Republican vision of relentless tax cuts, deregulation, and shrinking government is the road to ruin. Yet Obama's alternative of short-term and shortsighted stimulus is only marginally better. Neither approach is getting America back on track.
America requires at least a decade of well-designed and well-executed national investments in people, infrastructure, and innovative technologies, in order to boost competitiveness and renovate the economy. Yet such an effort requires serious plans, careful deliberation, and higher taxation on deadbeat corporations and the super-rich. (Obama's endorsement of lowering corporate tax rates in return for ending loopholes augers poorly once again, since it invites yet another gimmicky tax negotiation in the interests of the rich.)
I have no joy in expressing my skepticism of the latest "plan" (the fourth this year by my count, including the February budget, the April course correction, the August debt deal, and now the September jobs plan.) I want the president to succeed. I find the Republican opposition to be the epitome of greed and shortsightedness. Yet the truth remains: both parties are failing the American people. The needed professionalism of government and shared responsibility by America's elites have proven to be elusive for the political and economic establishment.
This post has been updated from a previous version.
Follow Jeffrey Sachs on Twitter: www.twitter.com/JeffDSachs
Rev. Chuck Currie: Pass The American Jobs Acts For A Stronger, More Moral America
An economy based on manufacturing cannot be easily replaced by a FIRE economy. A FIRE economy is any economy based primarily on the paper-intensive sectors of Finance, Insurance, & Real Estate.
This idea of replacing real products with paper was & is a pipe dream.
It didn't help when Ronald Reagan said,
“This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot.” So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act."
http://www.nytimes.com/2009/06/01/opinion/01krugman.html
Policy makers have been smoking from that same pipe ever since! They need to put something different in that pipe or, better yet, quit relying on hallucinogenics.
A child born today shouldn't have to rely on 'hitting the jackpot' to have a shot at a decent life.
Something is rotten in the state of Denmark, & in Washington, Greece, Ireland, Portugal ...
A great analysis.
BUT, finally somebody is seeing the root of the problem. Most of manufacturing gone.
Where are the jobs?
These are what I call the "Emperor's Jobs" now, can I dare to say so, starting to become visible.
The "reverse multiplying effect" of lost manufacturing jobs over the last 30 years has been colossal and hollowed out our economy.
I agree we must improve our international competitiveness
But also, we must promote a level playing field on import tariffs and currency .
We must promote advanced manufacturing.
We must tax US companies on profits abroad and give them incentives to repatriate and invest profits here.
Only a rebirth in manufacturing, both bringing back some jobs and creating new advanced manufacturing jobs, together with its (positive) multiplying effect will grow our economy and create realk consumer demand again.
I thought the congress was supposed to create legislation.
Namely the US government which subsidized risky loans to the tune of 100's of billions of dollars through Fannie and Freddie for decades
and not the usual suspects..."evil Wall Street bankers"
It's also good to see Sachs admit that Keynesian stimulus is a bust
and that the "millions of jobs created and saved" were a myth created by a CBO computer
and Democrat spin doctors
He is also right that our problems are structural and that we need fundamental reform
But his big government solutions won't work
Government controls our schools and meddles deeply in our healthcare system
The results are dire; more government is not the answer
Government can help with re-training and basic research but should get out of education beyond ensuring parents have the money to send their kids where they want
Innovation and energy should be left to the private sector and infrastructure to the states
Blaming both parties is also a little unfair
Democrats have had their two years in the sun whereas Republicans have been able to do little for the last two years beyond stop Obama
They have not yet had the chance to show what they can do
But they at least understand that the political spirit of today is a profound disillusion and mistrust of government
Democrats have not accepted this yet, until they do they will be condemned to electoral disappointment
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One of the components of Sachs' structural defects is the long standing stagnation in real wages of middle and lower income workers. So,institute a 15% pay increase for all hourly (non-exempt) workers across the country. It would not require new taxes (neither increases nor decreases) to implement. It would require businesses to accept a slightly lower profit level and a redistribution of their payroll cost allocations, i.e. they would not be allowed to simply transfer the added cost to their customers under this proposal.
Unfortunately the only way such a wide spread pay increase could even be attempted (short of a complete change in philosophy within business managements) would be by labor negotiating it. Wouldn't that be nice; more than100 million families across the country getting another $100 a week in their take-home pay envelopes. And if I'm not mistaken, they would immediately go out and spend every nickel of it, every week.
“ So, institute a 15% pay increase for all hourly (non-exempt) workers across the country. It would not require new taxes (neither increases nor decreases) to implement. It would require businesses to accept a slightly lower profit level and a redistribution of their payroll cost allocations, i.e. they would not be allowed to simply transfer the added cost to their customers under this proposal. ”
Are you serious ??? Do you know many small business (and large ones) only operate on a 3 or 4 % margin, which allows them to maintain, expand and live. Why burden them with cutting their net income for the sake of giving it to others? Instituting a policy of government mandated wage and price control doesn’t work, history proves it. A social/Marxist state may fair well from instituting this idea, but a capitalistic-democratic republic won’t.
I suggest you take a lesson in micro-economics.
I did not say it must be government mandated. Unfortunately however you point out a realistic situation in the country today. Corporate America would never voluntarily upgrade wages. The equalizer in the past has been organized labor through negotiation, but that was destroyed by Ronald Reagan. Your premise that a significant pay increase to middle and low income people would put companies out of business does not track with current business performance statistics. Corporate America profits are skyrocketing, very much a result of lowering payroll expense. I suggest you look at the change in micro-economics relationship of the middle income wage earners contribution to corporate profits vs their real compensation over the past 30 years. The data screams out at their disproportionate contribution relative to allocation of operating expense away from wages and to other operating expense factors. Businesses, small and large can reallocate their operating cost relationships and still keep significant profit. It's where they place priorities. Move money to the top, or to the bottom.
Ike Gittlen
I agree with your points.
Whilst the non-academics/ non-economist/ non-experts can understand all this viscerally, the academics, economists, experts, and also "interested parties" cannot see where the jobs are.
I call this "The Emperor's Jobs" and slowly some people are starting to see the "naked truth"!
Our economy has been hollowed out by the "negative multiplying effect" of the millions of manufacturing jobs lost over the last 30 years.
Only a rebirth in manufacturing, including advanced manufacturing, accompanied by FAIR trade and a parity in import tariffs, and also other sensible policies, will producing a "positive manufacturing effect", and grow our economy and make it prosperous again.
I wrote a paper 40 years ago when I was in college, about the new paradigm that computers would force on society. Where people were put out of work by machines, and what the government would have to do to supplement people's incomes, as entire categories of industrial jobs would basically cease to exist.
We are in need of a transitional public work program to give people the dignity of actual work and a paycheck, while we train a new generation in the industry of the future. This can only be done through the government. Private concerns will not take this initiative as there is no good profit motive. The government will have to raise revenue some way in order to support this program. I am not expert enough to make recommendations here, but it seems that taxing those who are not suffering would be a good place to start. But, the author is correct in stating that the old economy is dead and gone, and that we must fact the fact that there is a new economic order in our world..
Simple manufacturing such as appareal and textiles are gone for good. We just can't compete against much cheaper labor that needs next to no skills to engage in. Moreover, many of these countries are more than happy to see workers toil in unsafe conditions for what is about a couple bucks a day. Our grandparents fought for us not to live under those conditions.
An expanded and upgraded manufacturing base has a very good trickle effect. When the middle class is financially strong again as it was in the 1950s and 1960s there is the disposal income to buy and save. Moreover, purchase power comes from wages not easy credit which comes back to bite the consumer with a 28% interest rate.
Sadly, our politcians can't see the road that we need to take. Maybe because the answers will be so difficult. Its easier to scream about removing all regulations (most that keep us safe) and letting the Wild, Wild West manifest itself within the consumer sector, like liar mortgage loans.
jobs. It sounds a lot like the first Stimulus Bill which was way too small. And the other
thing about this is it's so "transparent" in the fact that it is aimed at the states Obama needs
to win. It's aimed at Independents and it's aimed at states he needs to win. Why doesn't he
bring together the best minds - CEO's, educators, innovators, visionaries and create a New
American Renewal Program - aimed at creating jobs and also creating a new energy and
excitement about fixing this country? I guess that's far too much to expect from such a timid
president.