The Misdirection Direction

The title of the explanatory fact sheet on the President’s new economic program is “A Better Bargain for the Middle Class: Jobs.”  That conveys several things.  For one, the White House understands that government is divided, and if you want to get anything done (or at least appear that you are trying to), you need to strike a deal.  Fine so far.  Second, most Americans either identify themselves, or wish they could identify themselves, as middle class.  So favoring that group is good politics, and actually succeeding in helping that group might well be good economics.  OK again.  Finally, the sore spot of the economy is jobs.  Four years into an economic recovery, we remain well short of the employment level of the previous cycle peak, and millions of Americans are so disheartened as to have given up looking for work.  So the title of the exercise seems promising.

The suggested deal is an exchange of corporate income tax reform, with the statutory tax rate reduced to no more than 28 percent — which is assumed to entail a one-time increase of revenues but to be revenue-neutral in the long run — in exchange for the use of those additional one-time revenues for specified one-time programs that will “support middle-class jobs.”

We should look at the two parts of this deal separately.  And we will discuss the corporate tax reform idea, both in the abstract and in the context of the President’s new program, in a post two weeks from now.  It is appropriate to ask at this time, however, whether the President’s conception is that the revised corporate tax would be revenue neutral plus yield a one-time revenue bump.  Only the fine print, not yet supplied, would answer that question.

And the other side of the bargain, in turn, can be viewed in two parts.  One is the entire notion of a one-time program.  The other is the individual pieces of that program, which itself requires the evaluation of each piece as a one-time rather than a permanent initiative.

So on with the analysis:  A one-time program for middle-class jobs?  Strictly interpreted, it would make little sense.  Why create public-sector jobs and then shut them down, with no chance of continuation?  Maybe this is a political instrument, not a policy plan — in which case anything could be intended.

But if it is policy, there are two possibilities.  One would be to put forward temporary programs in the anticipation that they will be made permanent, one way or another.  I don’t want to assume that the proposal’s true intent is contrary to what is stated.

The other possibility is that this program is focused not so much on direct job creation, but rather on indirect job creation — in other words, broad macroeconomic stimulus.  Four years after the putative end of the downturn, that would by historical standards seem unnecessary.  But this downturn was so extreme, and its effects through the financial market meltdown have been so persistent, that further temporary stimulus should not be ruled out.

But if this is truly another round of macroeconomic stimulus, then the choice of programs should be tailored to that purpose.  It wasn’t.  Let’s go through the President’s particular program choices to “support middle-class jobs” in light of this overall approach.

Infrastructure.  The big-money component of the President’s program is investment in infrastructure.  And if the jobs entailed in building and renewing infrastructure are the middle-class jobs we are talking about, then this overall approach is misguided on several counts.  First, it makes no sense to create middle-class jobs and then terminate them when the temporary funding runs out.  Second, heavy construction is a highly capital-intensive industry.  Mounting a major temporary push would entail a delay waiting for the manufacturing of the necessary new heavy machinery, and then would set that long-lived machinery idle when the program was over.  Even the stated purpose of the program to “fix it first” — in other words, give repair, not grand new projects, the highest priority — does not change those realities.

Personally, I believe that a persuasive case can be made that the nation has been a poor steward of its infrastructure — especially in terms of maintaining what we already have, but even with respect to augmenting our stock of public capital.  However, righting that “short-termism” is a permanent, not a temporary, task.  In the near term, we should fully employ the existing industry in that effort.  (It is, by the way, relatively close to full employment now; the widely lamented unemployment in “construction” is exclusively in residential construction, not heavy construction.)  Then, we should create a long-term plan to ramp up its scale.  But note that this requires a long-term plan — not the use of an arbitrary portion of an arbitrarily determined one-time revenue burst, based on whatever happens to come out of a not-yet-articulated corporate tax reform.

Rebuild America Partnership.  The public investment in infrastructure in the President’s program would be supplemented by private investment, including through a new public-private infrastructure bank and “America Fast Forward Bonds.”  This issue is widely and terribly misunderstood.  The cheapest possible financing of any public investment is through general-purpose Treasury securities, which carry the lowest yields in the market, period.  Those who advocate more public investment through private financing are trying to circumvent restraints on total government spending at a higher cost, not to save money through cheaper financing.  Some claim that they hope to enlist private expertise to select capital projects more efficiently.  That opportunity, however, is limited to projects that yield their own dedicated revenue streams — in other words, toll roads, and very little else.  Yet an infrastructure bank has become a cause celebre in the alleged service of greater overall public investment.  It is a misdirection play of the highest order.

New Manufacturing Innovation Institutes.  The President proposes new public regional institutes that would disseminate information about technology to businesses.  Personally, I am less skeptical about this idea than some.  We accept the dissemination of information — which is a public good in the economic sense — as a legitimate function of government.  That is why we have libraries, and why we have public funding of education.  Many modest-sized businesses do not have the economies of scale to devote their own resources to surveying the technological horizon.  The proposed institutes would disseminate information to firms in a more efficient way than those firms can collect it themselves.  This is not “picking winners” in the sense of subsidizing particular private investments.  It will not be easy to do well, but neither is education in the broadest sense.  And it should not be dreadfully expensive.  However, again, there is no reason to think of this effort as “temporary,” unless the notion is that the one-time revenue burst would be used for start-up costs, whereas the operating costs that followed would be built into the regular annual budget.  However, if that is the intent, it should be stated clearly up front.

Investing in Community Colleges to Train Workers for Jobs of the Future.  Community colleges have provided important success stories in an era of skyrocketing tuition and ponderous university bureaucracies.  They serve the needs of mid-career workers who do not need degrees, or perhaps additional degrees, but rather need to add or hone particular skills.  This item would seem to be one of the solid entries in the President’s program.  The only question is why it should be thought of as temporary.

No-Cost Parts of the Program.  The President’s program includes several components that would be undertaken through executive orders, which ipso facto says that they would have no cost (because a President cannot appropriate funds).  This also means that these items are not necessarily “temporary” in any meaningful sense.  (Some of these items purport to “increase investment” or similar language, rendering the organization of the overall program a bit confusing.)

One such item is a “Select USA” initiative, to convince foreign businesses to locate new plants in the United States.  This is probably unexceptionable.  It does, however, raise questions about awareness, or even hypocrisy; how can this nation spotlight a program to attract foreign investment, and at the same time decry U.S. businesses that consider investments overseas?

The program also includes an initiative to “Support U.S. Exports.”  That sounds like the  mercantilism that we criticize in other countries.  The fine print, however, indicates that the intent is to facilitate the negotiation of trade agreements, and to expand Trade Adjustment Assistance to workers displaced by freer trade.  In other words, this program is a sheep in a wolf’s clothing, and might be labeled purely for political advantage in a imperfect world.

The President proposes to jawbone business to hire the long-term unemployed.  Such jawboning surely is appropriate.  It is easy to look across a desk and shun someone with a big time gap in his or her resume.  But in the spirit of the Native American aphorism about walking in the other person’s moccasins, it may be too easy to ignore the handicap of working in a dying trade in an area with extraordinary unemployment, perhaps with an underwater mortgage that prevented moving to a more-prosperous locality.  One must note, however, that a campaign such as the President’s is a zero-sum game unless and until the nation approaches reasonable overall employment again.

Similarly, the President again proposes to increase the minimum wage.  As heartbreaking as low-wage work is, a time of massive unemployment is the worst to make market wages even less affordable for prospective employers.

The President proposes a program to “Strengthen America’s Manufacturing Communities.”  This looks like an effort to aid Detroit without using the word “Detroit.”  Other than in times of natural disaster, this nation never has been comfortable with explicit regional aid — which is why every such program must somehow be general.

And finally, the President proposes to “Increase Investment in Clean Energy Research.”  Such an effort makes sense, provided that what is increased is research, and that it is basic rather than applied in nature.  Develop and disseminate knowledge; don’t monkey with the market.

In sum, the President’s economic program includes several sound elements, packaged with a feel of clever marketing rather than sound policymaking.  Washington has important work to do and some worthwhile ideas on the table.  Let’s hope that we move forward with some serious conversations, soon.

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