Thursday, September 08, 2011

Will the Jobs Act see the light of day?

kw: politics, finance

Just about two hours ago U.S. President Obama finished his speech to a joint session of Congress promoting his American Jobs Act. In contrast to most prior speeches, in which he had the measured demeanor of a professor, he was passionately in the pulpit, preaching to a very mixed audience. There were actually some points he made that were received by standing applause from all present. Much more often, the Democrats applauded while the Republicans sat, stony-faced.

Basically, the President wants nearly $450 Billion to stimulate the economy in several ways: construction and re-construction of infrastructure, refurbishing about 35,000 public school buildings, and funding large tax cuts to small businesses that hire new employees. He claims this will be paid for with further deficit reduction, then at one juncture stated he will charge the deficit reduction panel to add the above amount to the amount they are supposed to identify.

I am half tempted to say, let him give it a try. Problem is, the deficit reduction efforts are inadequate; current legislation has "reduced" a $9 Trillion deficit over the next ten years to $8 Trillion (based on some shaky assumptions), and the aforesaid panel is tasked with finding another $1.5 Trillion, or now $2 Trillion. That is quite a reach, and there will still be an unprecedented level of deficit spending. My analysis is, the Act sounds like it has a number of good ideas but there really won't be the money to make it work.

I can't hazard a guess whether the Act will be passed by Congress, but I am pretty sure it will be amended beyond recognition by both houses, then face an acrimonious conference committee if both houses pass some version of it.

I took a look at history. Franklin Roosevelt didn't quite invent federal deficits, but he was the first to oversee a push of total debt past 40% of GDP; it quickly reached 100% of GDP. The post-war boom also produced a post-war surplus that dropped the debt into more manageable territory, but it is approaching 100% again. Anybody remember Ross Perot? During his presidential campaign he claimed that if we had a genuine budget freeze, the Federal budget would remain locked at $1 Trillion. Instead, it grew by a factor of nearly four, and now the deficit is $2 Trillion. Even if you adjust for inflation, President Obama has overseen a huge increase in Federal spending in just two years.

If there is a genuine shifting of the deficit to "cover" this Act, maybe it will fly. Otherwise, we simply can't afford it. It is like trying to remodel your house by borrowing more money when your loan is already upside down.

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