Friday, September 16, 2011

Obama's jobs plan – Pay now, tax later

In my first reactions to the "jobs speech" that Obama gave on September 8, I mentioned a few of my qualms about the speech itself and about some ambiguous features of the policy proposals Obama was outlining. Some of these qualms had to do with how Obama and his administration intended to offset the costs of his stimulus measures:
Obama and his advisers clearly decided that it was impossible for him to state a central truth about the situation clearly and explicitly (perhaps, in part, because it takes two sentences to state it): (a) In the long run, the federal government and the country as a whole need to find ways to live within their means (a process that will have to include rolling back the Bush tax cuts and further reform of the health care system). But on the other hand, (b) in the short run, until the economy has genuinely recovered from the economic crash of 2007-2009 and unemployment has been significantly reduced, cutting federal spending and trying to eliminate the federal deficit are very bad ideas that can only hamper economic recovery and will almost certainly make matters even worse. [....]

What Obama did was to insist that "The American Jobs Act will not add to the deficit. It will be paid for." Indeed, "everything in this bill will be paid for. Everything. (Applause.)" But Obama avoided saying anything concrete about how it would be paid for. Instead, the Congressional super-committee that's supposed to be finding ways to cut the long-term deficit will be charged with finding additional savings that to cover the cost of this proposal. Presumably, some of Obama's suggestions will be included in the "more ambitious deficit plan" he intends to release in a week and a half—"a plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run."

I will hope for the best, but I can see both practical and public-relations problems ahead. If Obama's promise that "The American Jobs Act will not add to the deficit" turns out to mean, in practice, that its costs will be offset by future savings over the long run, then in substantive terms that will be fine. In fact, it would make excellent sense in terms of substantive policy. [....] On the other hand, if the costs are supposed to be offset by other spending cuts in the relatively short run, then that would wipe out many of the positive effects of the whole initiative. [....]
Well, on September 12 the Obama administration did offer some concrete proposals, and based on everything I have read about them so far, I am reassured. At least, I am reassured that the overall plan makes sense in substantive terms, and should have a significant positive impact if it gets enacted; whether it can actually be passed in a non-eviscerated form is another question. The idea is, indeed, to inject the needed economic stimulus in the short run and offset the costs in the long run, and to do the latter with tax increases that target upper income brackets. Jonathan Cohn summed it up this way in his New Republic blog:
President Obama this week did exactly what he promised to do last week: He proposed a way to pay for his jobs bill.

In particular, he suggested raising taxes on the wealthy and then using the money to offset the cost of school building, payroll tax breaks, and other expenditures designed to boost the economy. He also invited the congressional super-committee to come up with alternatives, as long as they generate the same amount in combined savings and revenue.

Republicans were quick to pounce: Obama wants to raise taxes! Instead of saving the economy, he's going to kill it! And even less hyperbolic commentators from the right were unhappy. Here, for example, is Megan McArdle, who has actually said some charitable things about Obama's proposal. "Paying for the bill with tax hikes--any tax hikes--is going to substantially reduce the stimulus this bill provides."

Do they have a case? Most economists would agree that raising taxes right now would slow the economy. But let's be clear: That's not what the administration is proposing. As Budget Director Jack Lew confirmed in yesterday's White House press briefing, the tax increases wouldn't take effect until January 2013 -- i.e., sixteen months from now. That's a significant difference.

In addition, most center- to left economists believe that tax increases on the wealthy are far less likely to slow growth than tax increases on the middle class and poor. That's because the wealthy aren't likely to alter their spending habits substantially if their taxes go up. The poor and middle class are. (It's the same reason why so many economists think tax breaks for the poor and middle class provide more stimulus than tax breaks for the rich.)

More broadly, the general consensus among economists is that deficit spending now plus tax increases (and/or spending cuts) later is the best possible policy, since it would help the economy get out of its rut while promoting more balanced budgets in the future. Douglas Elmendorf, director of the Congressional Budget Office, made this point explicitly during his testimony before the super-committee on Tuesday [....]
As Cohn notes, there is one possible fly in the ointment.
Now, a key question is whether starting to increase taxes in January, 2013, would qualify as "later in the decade." There may be a good argument for waiting at least another year, and starting those tax increases in January 2014, just to give the economy some more room to grow. That's quite possibly what the smarter critics (like McArdle) have in mind. But I suspect most economists would consider the difference to be modest, particularly given the overall scale.

Remember, the administration is talking about spreading the tax increases over the course of ten years, or close to it, so the impact in any one year would be small. By contrast, the vast majority of stimulus spending and tax breaks would go out in that first year -- i.e., it'd be a lot bigger. Unless I'm missing something, the tax increases would have a small negative effect.
Sounds plausible, though I guess much will depend on details. Now the most crucial questions concern whether and in what form Obama's proposal can actually be enacted. Stay tuned.

—Jeff Weintraub