Conservative Criticism of Obama's Jobs Plan

Still Killing Jobs
by James Sherk
December 10, 2009 |

In his economic speech yesterday, President Obama made it clear that his administration will take a step forward on job creation. Unfortunately, it's also taking three steps backward -- which all adds up to more unemployment.

The good news is that Obama understands why unemployment has risen so sharply.

Media coverage strongly implies that joblessness has risen because layoffs are up -- but that's only part of the equation.

The number of jobs lost by firms rose 15 percent from the start of the recession to the first quarter of this year. These layoffs are real and painful for the workers involved. But they're not the driving force behind the doubling of unemployment.

The US economy usually loses millions of jobs each month as technology and consumer preferences change. But in normal times, new and expanding businesses create millions of new jobs -- more than replacing those that disappear. Twelve years ago, for example, Google didn't exist; today, it employs 20,000 Americans.

In regular economic times, most workers who leave jobs find new ones in two or three months. On balance, job creation offsets job losses, keeping unemployment under control.

In this recession, however, those new jobs aren't being created. Business startups have dropped 18 percent. Expanding or startup companies are creating 25 percent fewer jobs than before the recession. That represents 1.9 million jobs not created in the first quarter of the year.

Rather than investing in new projects that would create jobs, businesses have retrenched wherever they can.

In other words, unemployment has risen mainly because of the new jobs that entrepreneurs haven't created.

Obama understands this: "We are not creating jobs at a [sufficient] pace," he said yesterday; to reduce unemployment, America needs to "accelerate the pace of private-sector hiring."

So he announced one small step toward doing that: eliminating capital-gains taxes on small businesses and extending write-offs for small-business investment. Both these moves will indeed encourage entrepreneurs to take the risk of investing in their businesses -- and thereby create new jobs.

But then there are those three large steps back.

First, the president announced another stimulus (though without calling it that). He wants to use hundreds of billions in unspent TARP funds on more government spending: more highways and "cash for caulkers" home-weatherization funds.

And, despite Obama's rhetoric, most of his "pro-employment" proposal consists of such government spending to create more taxpayer-funded jobs.

This government spending doesn't make new businesses more likely to succeed. So it won't encourage entrepreneurs to invest, unless they receive the federal contracts. Bigger government doesn't encourage entrepreneurs to create jobs.

Worse, it discourages them. The more resources Washington consumes, the fewer entrepreneurs have to invest in their own projects.

The academic research is quite clear that government jobs are created at the expense of a greater number of private jobs -- with the one reliable study (Algun et al, in Economic Policy, April 2002) suggesting that for each 100 jobs "created" in the public sector, another 150 private-sector jobs vanish.

So it should surprise no one that private-sector hiring has remained low -- and unemployment has kept rising -- since the last stimulus became law.

Second, Obama reiterated his support for the health-care reform bills before Congress. But a trillion-dollar government health-care takeover won't create jobs. Indeed, these bills would raise taxes on employers and make providing health coverage (i.e., employees) more expensive while penalizing employers who don't offer it. Such laws would make businesses more likely to fail.

Yet the president yesterday signaled his determination to press forward with health "reform" no matter what it does to business prospects. How are entrepreneurs likely to react?

The third step back came Monday -- an administration action that's guaranteed to make businesses fear the future. The Environmental Protection Agency announced it had classified carbon dioxide as a pollutant under the Clean Air Act. Unless stopped, the EPA will start regulating CO2 -- giving it enormous power over every business in the country. Energy will grow far more expensive, and business costs will rise -- and no one knows just how bad the damage will be.

Obama yesterday did nothing to relieve the confusion or assure businesses that EPA's actions won't destroy jobs en masse. Waiting to see what the EPA does is the rational choice for many entrepreneurs. Why risk millions on a business project that might become unprofitable under new regulations?

Unemployment has risen because private-sector job creation has fallen. It won't fall until private-sector investment and hiring return to normal rates. Obama's tax breaks for small business are a small step forward. But his plans for spending hikes and health-care "reform," plus the EPA's impending carbon regulations, are three large steps back.

James Sherk is Bradley Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

First Appeared in the New York Post

The Real Unemployment Rate, a Broader Measure of Unemployment, Reaches 17%

In the October 19, 2009 Salon article "That sound you hear is the social fabric about to snap," Michael Lind says "the real unemployment rate is almost 20 percent. Here's what the federal government can do about the jobs crisis."

According to official statistics, the unemployment rate in the United States is now 9.8 percent. But those statistics understate the severity of the jobs crisis. The official statistics do not include the 875,000 Americans who have given up looking for work, even though they want jobs. When these "marginally attached" workers and part-time workers are added to the officially unemployed, the result, according to another, broader governement measure of unemployment known as "U-6," is shocking. The United States has an unemployment rate of 17 percent.

And even this may understate the depth of the problem. By adding the 3.4 million Americans who want a job but have not looked for one in over a year, businessman, philanthropist and Obama advisor Leo Hindery Jr. infers an actual unemployment rate of 18.8 percent. In other words, nearly one in five Americans is unemployed or underemployed.

The sound you hear is the sound of the social fabric in America rotting and beginning to snap. Thanks to the unemployment insurance system adopted during the New Deal years, and thanks in part to the stimulus that the Obama administration and Congress passed earlier in the year, we do not have hordes of out-of-work Americans standing in line at soup kitchens and riding the rails from town to town. Even so, the invisible decay of America's social order is just as real as the highly visible decay of abandoned McMansions in new developments that are turning into ghost towns across the continent.

Mass unemployment has yet to spawn a wave of crime or social unrest. But those possibilities cannot be dismissed. And the desperation is real, even if it is not signaled by desperate acts. The psychological toll of prolonged unemployment is devastating on individuals who have lost their roles as breadwinners or productive, self-reliant citizens. Employers prefer not to hire people who have been unemployed for long periods -- and laid-off workers today are spending an average of 26.2 weeks without jobs, the highest average since the Great Depression. And then there are the new graduates of high schools and colleges, a lost generation whose members may be crippled throughout their careers by the lack of opportunities in their youth.

The American political class, insulated by wealth and connections from the economic storm, has been slow to respond to this crisis. The Democratic majority in Washington has hoped that the stimulus would solve much of the problem. While waiting for its effects to manifest themselves, the Democrats have focused on long-term problems of structural reform -- healthcare, the environment, education. The Republican right has nothing to offer, except a contradictory message that both taxes and deficits should be drastically cut.

During the campaign, candidate Obama promised a jobs tax credit. That idea was left out of the stimulus, however. Democrats feared that employers would game the program while Republicans wanted broader tax cuts for business and individuals. Last spring, some administration officials said complacently that "employment is a lagging indicator" and that the jobs would return if we were patient enough. Now that unemployment is both worse than expected and more enduring, there is a growing recognition of the need to do something to address the sinkhole in the economic landscape into which so many individuals and communities are tumbling.

My colleagues and I at the New America Foundation's Economic Growth program have put together an expert round table featuring different proposals. Timothy J. Bartik of the W.E. Upjohn Institute for Employment Research proposes a New Jobs Tax Credit, like the one that candidate Obama favored, modeled on Carter-era precedents and an innovative state program in Minnesota. James K. Galbraith of the University of Texas proposes a major expansion of federal funding of state and local services, education, healthcare, infrastructure and energy investment. And L. Randall Wray of the University of Missouri-Kansas City proposes that the government act as employer of last resort, offering a job to anyone who wants one.

My guess is that Congress, if it does anything, will be attracted to tax credits for new jobs. In our taxophobic age, Congress always prefers tax credits to direct spending. But in the absence of demand for their goods and services, employers are not going to hire more workers, no matter what incentives are provided. For this reason, the optimal synthesis might be a combination of tax credits to lower the cost of hiring with sustained public investment in infrastructure and public services, where the government for the foreseeable future must replace the tapped-out consumer as the driver of demand in the U.S. economy for the next few years.

All of these policies would cost at least tens of billions in additional federal spending a year, for the next few years. But the costs must be kept in perspective. After the additions to the federal deficit and debt created by the stimulus and the bailouts of the banking sector, even ambitious jobs programs would add relatively little to America's long-term fiscal shortfall. And while the benefits could be estimated, the psychological and social benefits of putting Americans back to work, in terms of self-esteem and hope about the future, are literally incalculable.

Ronald Reagan was fond of saying, "Don't just do something, stand there." While this may sum up the approach of a certain kind of complacent, anti-government conservatism, the sentiment is not only politically suicidal but also unethical in a country where mass unemployment and mass foreclosures have littered the landscape with rotting houses and rotting lives. Like the New Deal Democrats, today's Democrats need to experiment ceaselessly, trying and abandoning programs until they find some that succeed in putting Americans back to work in a productive economy.

If we can bail out the employees of Wall Street, we can bail out the unemployed on Main Street. And we had better do so quickly, if we don't want that rotting sound to be followed by a sudden snap.