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What Happens If Obama’s Plan Can’t Create Enough Jobs?

The president pivoted in last week's State of the Union speech to emphasizing jobs as his health care plan stalled. But there are serious doubts among progressive economists

The president pivoted in last week’s State of the Union speech to emphasizing jobs as his health care plan stalled. But there are serious doubts among progressive economists, independent analysts and even small businesses that could receive his proposed tax credits whether his jobs creation package will actually work.

The political and economic urgency couldn’t be any greater for Democrats. The country has lost nearly eight million jobs in the recession so far, and with a growing working-age population, there are now 27 million people either unemployed or working in jobs with too few hours. The country will need to add about 10 million new jobs just to return to the prerecession unemployment levels of 4.9 percent. As the Economic Policy Institute explained, “Each month we need to create 127,000 jobs just to keep unemployment from rising. Therefore, we actually need 10.9 million new jobs to get us back to 4.9 percent unemployment.”

Just as troubling for Democrats, the Congressional Budget Office still projects unemployment rates at 10 percent through this year, and high unemployment through 2011 at least, all while populist anger at Washington’s bailouts and policy failures is mounting. Meanwhile, cowed Democrats are eager to “run for the hills,” as Obama put it, after misreading the message of Massachusetts Senator-elect Scott Brown’s victory as a complete rejection of health reform. They’re also gun-shy about taking any bold actions.

“I don’t really see this having much impact,” economist Dean Baker, co-director of the Center for Economic and Policy Research, told Truthout about the new cornerstones of the president’s plan. These are tax credits worth $33 billion to spur small business hiring, and $30 billion in TARP funds to give to community banks to promote more lending. That’s on top of the president’s support for infrastructure spending and other measures already passed by the House in December.

But as Baker pointed out, studies show that demand for labor isn’t affected much by lowering the cost to employers, which is what the $5,000 tax credit for each new hire essentially does.

Moreover, despite the administration’s proposed efforts to prevent businesses from gaming the system, Baker noted that, even in this recession, “In any given month, about four million people are being hired,” despite the net job losses reflected in a rise in unemployment in 43 states in December. (Thanks in large part to the Obama-promoted stimulus, though, the new monthly unemployment figures are only a fraction of the 700,000 monthly job losses when Obama took office.)

As a result of such hiring that occurs even in troubled times, Baker argued, “You’re giving a tax to businesses for doing nothing they wouldn’t do otherwise.” In addition, he favors federally subsidized work-share programs that would enable people to work fewer hours at nearly their original salaries as industries hire more people. So, he was especially disturbed at the proposed tax credit’s approach to encourage businesses to pay for longer work hours. That, he argued, would shut out more unemployed people from getting any jobs at all. “It seems counter-productive,” he said.

Other progressive economists favor a tax credit if it’s offered widely – and wisely. The progressive Economic Policy Institute contended, “The fifth and final component of the American Jobs Plan is a tax credit for new job creation deployed over the next two years. According to our estimates, a tax credit for firms equal to 15 percent of expanded payroll costs would lead them to hire an additional 2.8 million employees next year.” Even assuming that the EPI approach would be wide-ranging, targeted and effective, it’s still much larger than anything the Obama administration is proposing: “We estimate the gross revenue cost to be between $71 billion and $80 billion in the first year,” although EPI contended much of that cost would be offset by billions in savings on safety-net programs and higher corporate tax receipts due to a resulting economic recovery.

But small business owners interviewed by Reuters didn’t embrace the tax incentive as a way to promote their own hiring. In the article titled, “Obama’s jobs focus offers no fast fix,” the news service cited the concerns of a graphic sign company owner, Jim Pettit of Elkhart, Indiana:

He does not want to risk hiring workers now only to find the recovery was a false dawn, possibly forcing him to let them go.

“One or two orders isn’t going to do it,” he said. “I want to see on the horizon a reliable growth pattern and then I would consider adding to the work force.”

Surprisingly, the other plank of Obama’s job proposal – promoting lending through community banks –may not work as expected, either. Despite the popular notion of big-hearted, Jimmy Stewart-style community bankers willing to lend to small businesses if they were just given more federal aid, Baker, other experts, and some small businessmen throw cold water on that idea by saying it’s a poor economic climate for businesses that makes banks reluctant to lend.

“It’s kind of a joke. It’s just for show, symbolism,” Baker said of the plan. “There is no evidence that banks aren’t lending because they don’t have the money.” But what if the funds were given with explicit strings attached, requiring lending to small businesses and with federal guarantees? In that case, he contended, banks would turn to the riskiest investments with the highest possible return – leading to just the sort of economic bubbles he descried in his previous book, “Plunder and Blunder.”

Small business leaders and other experts were also skeptical about the purportedly win-win community banking plan. As U.S. News reported:

Overall, though, the response to the lending proposal was lukewarm. “Community banks don’t need any money to loan to small businesses. They’ve got plenty of money; they’re flush with cash,” said Jim Blasingame, a small-business expert and the host of “The Small Business Advocate Show,” a nationally syndicated radio show. The real problem, Blasingame said, is that not enough businesses are in a position to take out loans. “Small businesses aren’t borrowing money,” he said. “Small businesses aren’t coming to the banks to ask for loans.”

According to Blasingame, what small businesses need is job creation in the broader economy so that consumers will have more money to spend on the products the businesses produce …

Raymond Keating, the chief economist for the Small Business & Entrepreneurship Council, is also hesitant. “Do you want to go down the path of having the government come in and give you money with all the strings?” he asked. “Frankly, I’m not quite sure a lot of banks want to go down that path.”

In contrast to these tax and lending approaches, the AFL-CIO, experts at the Economic Policy Institute, and other progressives have called for much stronger actions – including direct hiring in public sector jobs in hard-hit areas – that could create as many as 4.6 million jobs in one year. But they come with price tags that make them virtually impossible to get through today’s Senate, unless, possibly, there was a massive grassroots campaign aided by a powerful bully pulpit for mammoth government jobs spending, led by President Obama.

But Obama is now, in part, going in the other direction, by calling for a freeze on nonsecurity discretionary spending, which is likely to hamper any economic recovery that also includes millions of new jobs. As Robert Borosage, co-director of the Campaign for America’s Future, has pointed out:

What about jobs?

Right now, we need a bold, big jobs program to put people back to work. One in five Americans are unemployed or underemployed. Foreclosures are up, and soon one in three homes with mortgages will be underwater. States and localities are facing crippling layoffs from budget shortfalls. The human costs – in lost homes, lost hope, lost jobs, broken families, and frightened children – are staggering.

Obama’s initial recovery program has staunched the free fall of the economy, but it has not been big enough nor targeted enough to put people back to work. The slow and halting recovery that is in sight will do little to create the jobs we need. Republicans have argued that Obama’s plan has failed since the day it was passed. They call instead for reducing spending to cut deficits now. This is dangerous nonsense that must be confronted. Cutting spending and deficits now will only sap any growth, add to unemployment and quite possibly tip the country into a new downturn.

But with Democrats apparently hysterical about independent voters going South on them, the president has chosen to duck and cover. He’ll endorse – I hope – a jobs program this year, but simultaneously offer up the three year domestic spending freeze starting in 2011.

How can the president strengthen the spine of the Congress to do something real on jobs when he is catering to the panic on deficits?

Unfortunately, the ambitious jobs proposals from labor and progressives that they believe could actually make a serious dent in the unemployment problem go against today’s prevailing political winds.

In announcing its American Jobs Plan, which would ultimately cost a now politically-unsellable $400 billion, Lawrence Mishel, EPI’s president, declared in November, “Unless we act boldly to create more jobs, millions of families will fall into poverty, the fragile recovery will falter and the resulting economic damage will plague us for a long time.”

The House narrowly passed a $154 billion package in mid-December that included some scaled-down elements of the EPI and labor proposals, including adding spending on infrastructure, aiding states and localities to keep front-line workers like cops and teachers, and providing a safety net for the unemployed, including extending unemployment benefits and COBRA subsidies. But the Senate has shown little appetite for such relatively large-scale spending, except for the safety net provisions, perhaps even less so after the Massachusetts political revolt. As The Washington Post reported last week:

The measure isn’t quite finished yet, but sources said the current [draft Senate] version would cost just over $80 billion. Though that number may change as the process moves forward, it is clear Senate Democrats have no intention of moving a jobs package as large as the $154 billion measure the House passed in December on a narrow, party-line vote. The House measure included money to extend unemployment benefits and COBRA health insurance coverage, items that aren’t in the draft Senate bill but may move in the chamber separately.

“There is ‘big bill fatigue’ in the Senate right now,” said a Senate Democratic aide …

Senate aides declined to spell out the details of the potential Senate package in interviews with Truthout, but they’re confident that some sort of jobs package will pass the Senate. But even with possible worthy additions to any legislation, such as Sen. Sherrod Brown’s proposed bills to expand SBA lending to small businesses and retool small and mid-size manufacturing for the green economy, it’s clear that the Senate just isn’t willing to take as expansive an approach to jobs creation as progressives want.

Even the relatively modest approach favored by the Obama administration faces an uphill battle in the Senate, while the senators working most actively on it are playing down expectations for its impact on the economy. As The Wall Street Journal reported:

The White House on Sunday urged the Senate to pass legislation quickly to stimulate growth in the moribund jobs market, as it ramps up efforts to address bread-and-butter issues important to voters.

White House press secretary Robert Gibbs, speaking on CNN’s “State of the Union,” said the administration was seeking a jobs bill that would cost about $100 billion. “The president hopes that the next order of business the Senate will take up is this package,” Mr. Gibbs said …

“Obviously we are not creating the jobs we would like, and I think that some additional recovery or stimulus money is important in order to again create an environment for small businesses” where they feel confident hiring new workers, Mr. Gibbs said.

Yet, truly revealing – and disappointing to progressives – comments about the prospects for meaningful jobs legislation came in statements Sunday by influential Senate Democrats. As the Journal noted:

[Sen. Byron Dorgan (D-North Dakota] and Sen. Richard Durbin (D., Ill.) are leading the drive in the Senate to craft a jobs bill. But Mr. Dorgan on Sunday sought to play down expectations that actions by the federal government would be able to kick-start widespread job creation.

“The government doesn’t create jobs by and large,” he said. “The private sector creates jobs, especially small- and medium-size businesses.”

But with the prospect that incentives to those businesses won’t produce the job gains promised for them, what happens next? It seems that relatively few in Washington are hearing the urgency expressed, for instance, by AFL-CIO President Richard Tumka. While praising Obama for emphasizing the importance of creating new jobs, he also said:

We want to see elected leaders who’ll fight for us and bring real change. We want jobs – President Obama is absolutely right that jobs must be our number one focus in 2010. And we must act on a scale that will be meaningful: We need more than 10 million jobs just to get out of the hole we’re in …We hope elected leaders at every level will choose to lead with action. Working America is watching to see what they do. We are in a “show me” kind of mood and we are ready to see results.

But based on the response in Washington over the last week, those sorts of results may be too long in coming for the millions who need help now.

That’s why the Campaign for America’s Future, among other groups, is organizing a grassroots campaign with the message for the Senate: “We need action on jobs NOW!” But the agenda progressives are seeking goes well beyond what seems likely to pass Congress:

There is work to be done. We need to rebuild America’s schools and roads. We need to generate clean American energy. We need to keep teachers and police officers on the job. We need public service jobs to put people to work on jobs that need to be done. And we need to make certain that our taxpayer dollars are creating jobs here – and not being shipped abroad.

If such pleas are ignored, though, Democrats could be facing the worst of all possible political words in November and beyond: condemned as ineffectual if they fail to pass health reform and denounced by the GOP as socialist-style wasteful spenders – even as they may only take half-measures that won’t dramatically improve the joblessness facing millions of American families.

UPDATE: As Bill Scher’s Progressive Breakfast news round-up reports today, Sen. Max Baucus is slowing down the Senate draft to reduce its scope, while the president’s new budget includes $100 billion for jobs creation:

Obama FY 2011 budget proposal released today, includes jobs initiative smaller than House version, bigger than Senate. NYT: “Mr. Obama’s proposed $100 billion stimulus package, which includes tax credits for small businesses that make new hires and money for infrastructure projects, is less than a $154 billion package that the House approved in December but more than a measure the Senate is drafting.”

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