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Obama's Costly, Unaffordable, Harmful New Stimulus: The "American Jobs Act"

President Obama wants Congress to pass a $447 billion proposal called the "American Jobs Act,"  a costly set of recycled stimulus plans that contains no new ideas about how to fix the economy. It contains more money for the long-term unemployed, more infrastructure spending, and funds for hiring laid-off teachers. It also would extend a cut in the portion of payroll taxes paid by employees. The measures would be financed mostly by deficit spending, but partly, if Obama has his way, by raising taxes on the so-called "rich" -- a category that includes most of the small business owners who actually hire people -- and by eliminating what the administration refers to as "tax loopholes" -- which are not really tax loopholes at all, but rather provisions that allow industries disfavored by the administration to benefit from the same tax code provisions as other industries. (What is a tax "loophole" to the Obama administration is actually evenhanded non-discriminatory treatment of different industries, according to The Washington Examiner's Tim Carney and other observers. For example, to Obama, letting the petroleum industry receive the benefits of tax code provisions that also apply to other energy or resource-extraction industries like mining qualifies a "loophole," as does treating the oil companies the same as farmers or timber companies; while giving tax credits solely to a politically-favored industry or manufacturer, such as a politically-connected "green-jobs" firm, or a taxpayer-subsidized ethanol manufacturer, is not a tax loophole to Obama).

Even the least-bad of Obama's proposals will not grow the economy. Aid for the long-term unemployed will reduce the size of the economy by encouraging some people to not accept jobs that pay far less than they were accustomed to, even when those are the only jobs available to them. Obama's proposed infrastructure spending will not grow the economy either, as Veronique de Rugy and others note, since it will be accompanied by costly Davis-Bacon mandates designed to favor unions (which raise the cost of transportation projects and exclude many small non-union contractors), and some of it will be wasted on rail boondoggles and pork rather than roads and bridges, or on Obama Administration pet projects, like energy efficiency, that require specialized skills that most unemployed construction workers lack. (Ironically, Obama removed most transportation spending from the original $800 billion stimulus package for political reasons, replacing it with more harmful welfare and social spending.)

By requiring above-market wages for the jobs it funds due to laws like Davis-Bacon, the Obama administration's proposal virtually guarantees that it will end up siphoning off people who are already employed from other employers, rather than just hiring the jobless, who are more likely to be willing to work for modest wages. Only 42 percent of the people hired under the stimulus package, for example, were previously unemployed, partly due to the above-market wages paid by many of the government jobs it subsidized, which resulted in some private employers losing employees and having to spend costly sums training their replacements. As a result of the stimulus, grant recipients "poached workers from their competitors," financially injuring those companies.

Meanwhile, by sucking money out of the private-sector economy, the stimulus wiped out a million private-sector jobs, even as other stimulus provisions outsourced American energy jobs to foreign countries, and wiped out jobs in America's export sector, resulting in a net loss to the economy of 550,000 jobs, according to two economists. The Obama administration's use of taxpayer money to subsidize above-market wages for government employees is at odds with what economists like Lord Keynes (the father of the Keynesian school of economics) counseled in past recessions, and what Franklin Roosevelt did in the Great Depression, when he hired people to do construction and transportation projects in the WPA but paid them only very modest wages, providing opportunities to the unemployed without siphoning off useful talent from private-sector businesses.

Continuing unemployment benefits at current levels for the long-term unemployed is a mistake. Generous unemployment benefits discourage people from taking lower-paying jobs, and sometimes result in people gaming the system. Giving people unemployment benefits for years on end, without scaling down those benefits, encourages people not to relocate in search of work, and not to take productive jobs that they think are beneath them, even if those jobs are the only jobs that they will realistically find once their jobless benefits come to an end, because of the disappearance of the type of job they once performed.

As the Heritage Foundation notes, “The consequences of extended unemployment benefits are some of the most conclusively established results in labor economic research. Extending either the amount or the duration of UI benefits increases the length of time that workers remain unemployed. UI benefits subsidize unemployment. They reduce the incentive unemployed workers have to search for new work and to make difficult choices–such as moving or switching industries–to begin a new job.”

The President's proposed subsidies for laid-off teachers discriminate in favor of one occupation, without any legitimate reason for doing so: the unemployment rate among teachers is vastly lower than for many occupations, and lower than for most.  It is best understood as the Administration pandering to the teachers' unions.  The proposed payroll tax cut will increase the deficit (which will increase debt-service costs in the long run, thus crowding out private investment over the long haul) while creating relatively few jobs.  (The CBO similarly concluded that the $800 billion stimulus package would shrink the size of the economy over the long run by increasing the national debt and thus resulting in increased government spending on interest payments that will crowd out private investment).