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Obama Jobs Plan is More of the Same

Politics / US Politics Sep 10, 2011 - 07:05 AM GMT

By: Peter_Schiff

Politics

Best Financial Markets Analysis ArticleAlthough it was labeled and hyped as a "jobs plan," the new $447 billion initiative announced last night by President Obama is merely another government stimulus program in disguise. But semantics are of supreme importance in American politics...some could argue that word choice is the only thing that matters. As a result, despite the fact that this plan bears no substantive difference from previous stimulus bills, the President never once mentioned the word "stimulus" in his hour-long speech.


But a rotten banana by any other name still stinks.

Like all previous stimuli, this round of borrowing and spending will act as an economic sedative rather than a stimulant. Running up the deficit in the short-run will not grow the economy, but will merely dig it into a deeper hole. A year from now there will be even more unemployed Americans than there are today, likely resulting in additional deficit financed stimulus that will again make the situation worse.

The President asserted that the spending in the plan will be "paid for" and will not add to the deficit. Conveniently, he offered no details about how this will be achieved. Most likely he will make non-binding suggestions to future congresses to "pay" for this spending by cutting budgets five to ten years in the future. History is absolutely clear on one point: politicians never pass cuts promised by prior politicians. In other words...the check is in the mail. So I will make the fairly riskless assumption that the plan will be financed by deficit spending. If so, the negatives associated with greater deficits will overwhelm any perceived benefit the spending will generate.

President Obama claims he wants to put money into the pockets of American consumers. The problem is the government's own pockets are empty. In order to put money in the pocket of one American, it must first pick the pocket of another. The problem is that it takes more from the pockets it picks than it puts into the pockets it fills.

In the meantime money to fund the stimulus has to come from somewhere. Either the government will borrow it legitimately, or the Federal Reserve will print. Either way, the adverse consequences will damage economic growth and job creation, and lower the living standards of Americans.

There can be no doubt that some jobs will in fact be created by this plan. However, it is much more difficult to identify the jobs that it destroys or prevents from coming into existence. Here's a case in point: the $4,000 tax credit for hiring new workers who have been unemployed for six months or more.

The subsidy may make little difference in effecting the high end of the job market. An employer will not pay a worker $50,000 per year simply to qualify for a one-time $4,000 credit. But the effects will be felt on minimum wage jobs where rather than expanding employment it will merely increase turnover.

Since an employer need only hire a worker for 6 months to get the credit, for a full time employee, the credit effectively reduces the $7.25 minimum wage (from the employer's perspective) to only $3.40 per hour for a six month hire. While minimum wage jobs would certainly offer no enticement to those collecting unemployment benefits, the lower effective rate may create some opportunities for teenagers and some low skilled individuals whose unemployment benefits have expired. However, most of these jobs will end after six months so employers can replace those workers with others to get an additional tax credit.

Of course the numbers get even more compelling for employers to provide returning veterans with temporary minimum wage jobs, as the higher $5,600 tax credit effectively reduces the minimum wage to only $1.87 per hour. If an employer hires a "wounded warrior" the tax credit is $9,600 which effectively reduces the six month minimum wage by $9.23 to negative $1.98 per hour. This will encourage employers to hire a "wounded warrior" even if there is nothing for the employee to do. Such an incentive may even encourage such individuals to acquire multiple no-show jobs from numerous employers. History has shown that when government creates incentives, the public will twist themselves into pretzels to qualify for the benefits.

The plan creates incentives for employers to replace current minimum wage workers with new workers just to get the tax credit. Low skill workers are the easiest to replace as training costs are minimal. The laid off workers can collect unemployment for six months and then be hired back in a manner that allows the employer to claim the credit. The only problem is that the former worker may prefer collecting extended unemployment benefits to working for the minimum wage!

The $4,000 credit for hiring the unemployed as well as the explicit penalties for discriminating against the long term unemployed will result in a situation where employers will be far more likely to interview and hire applicants who have been unemployed for just under six months. Under the law, employers would be wise to decline interviews with anyone who has been unemployed for more than six months, as any subsequent decision not to hire could be met with a lawsuit. However, to get the tax credit they would be incentivized to interview applicants who have been unemployed for just under six months. If they are never hired there can be no risk of a lawsuit, but if they are hired, the start date can be planned to qualify for the credit.

The result will simply create classes of winners (those unemployed for four or five months) and losers (the newly unemployed and the long term unemployed). Ironically, the law banning discrimination against long-term unemployed will make it much harder for those people to find jobs.

Another problem is the President's intention to help under-water homeowners refinance their mortgages with lower rates. While this will certainly be good for the borrowers, it will be horrific for the banks holding the loans. The borrower's gain is simultaneously offset by the bank's loss. This will further impair the solvency of our banking sector, exacerbating the losses and failures when rates rise, thereby increase the costs to taxpayers of the next round of bailouts.

Moving from the sublime to the ridiculous, the President claims his payroll tax cuts will not endanger the Social Security Trust Fund, as the government will replace the lost "contributions" with transfers from general revenue. In other words, the government will borrow money, put it in a phony trust fund, then borrow the same money back from the trust funds and spend it on the stimulus. It is amazing the theatrics the government will go through to maintain the illusion that trust funds actually exist. The tragedy is that Americans continue to buy the charade and even heap scorn on those, like Rick Perry, who has the temerity to point out that the emperor is naked.

The truth of course is that no real economic growth or job creation is going to occur until the failed policies of both Obama and Bush are reversed. In his speech the President mourned the death of the American dream. Obama should stop killing it. To revive that dream we need to revive the American spirit that produced it in the first place. That means returning to our traditional values of limited government and sound money. Unfortunately we are still headed in the wrong direction.

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Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

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