With unemployment stuck above 9 percent, Americans are looking to the White House, Republican presidential candidates and the Federal Reserve for credible plans to boost job growth. None of the proposals now being floated hold much promise.
Falling home prices continue to wipe out equity for millions of households. Manufacturing has slowed sharply as demand for goods has fallen. After borrowing heavily for a decade, consumers and governments are make deep cuts in spending.
In his speech to Congress Thursday night, President Barack Obama acknowledged the limited impact the federal government can have in spurring job growth in an economy that many analysts warn is reaching "stall speed."
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"Ultimately, our recovery will be driven not by Washington, but by our businesses and our workers," Obama said. "But we can help. We can make a difference. There are steps we can take right now to improve people’s lives."
Roughly half the cost of the president's $450 billion proposal would simply extend existing programs, including a payroll tax cut for workers and extended unemployment benefits. The plan also includes $105 billion for building new schools and other infrastructure and about $35 billion in aid to states to prevent layoffs of hundreds of thousands of workers including teachers, police officers and firefighters.
By focusing much of the program on tax cuts, Obama is hoping to increase the chances of winning support from congressional Republicans who favor lower taxes. While tax cuts may make for better politics, the economics aren't as compelling, according to Cornell economist Robert Frank.
"There is pretty broad agreement that the best, most effective use of money to stimulate the economy is through grants to the states that help prevent teacher and police layoffs, spending on infrastructure projects," he said. "Those kinds of things get you a big multiplier. If you give tax cuts, those dollars get hoarded for the most part."
Payroll tax cuts
Wage earners are already taking home roughly $1,000 a year in payroll tax breaks enacted last year. Obama is proposing that the tax cut be extended for another year and deepened. The average household would see another $500 in savings in 2012 on top of existing cuts. Wage earners at the upper end of the income ladder are already saving about $2,200; they would pocket roughly another $1,000 for the year.
Obama is also proposing a series of tax breaks for companies that hire new workers, including bonuses for hiring veterans and applicants who have been out of work for a long time. But those incentives have had only mixed success in the past. In most cases, onetime tax breaks aren't a major reason companies decide to hire new workers.
The president's speech left out key details, some of which he promised to provide in coming weeks. Until then, Republican leaders have responded with promises to try to find common ground with the White House.
"We want to work with the president to make sure we can make a difference that employers can get back into the game and create some jobs," said House Majority Leader Eric Cantor. "What I heard in the speech last night were some policy proposals that actually are something that we can work on together."
Beyond Obama's proposed tax cuts, Republicans also reacted favorably to the president's call for new trade agreements. But there is little GOP support for the spending side of the White House plan.
"Temporary stimulus does not work," said House Budget Committee Chairman Paul Ryan, R-Wis. "It does not give businesses confidence to invest in jobs and capital for the future. It's just sort of sugar-high economics."
Republicans argue that the quickest way to create jobs is to ease regulations on businesses and cut corporate taxes. Both of those ideas got a nod from Obama, but there's far less middle ground on Capitol Hill on those issues.
Obama's Republican opponents in the presidential campaign have voiced similar jobs proposals. Former Massachusetts Gov. Mitt Romney has offered the most detailed economic plan to date. His proposals include cutting taxes, drilling for more oil and natural gas, expanding trade pacts and cutting federal spending.
None of the proposals from either party, however, can address the primary cause of the current high levels of unemployment: Consumers and governments are still digging out from under a giant debt pile that took over a decade to create. Falling home prices cut further into household spending power. Resulting high unemployment rates have left consumers unwilling or unable to spend enough to spur growth in demand that would create more jobs. Economists say that vicious cycle is very difficult to break.
"The original Obama stimulus in 2009, which was nearly $800 billion, albeit spread over slightly more than two years, didn't do it. The payroll tax cut at the start of this year didn't do it, either," said Paul Ashworth, a senior economist at Capital Economics. "In an environment where economic confidence has been almost completely destroyed, there is a risk that both households and small businesses will save a greater proportion of any windfall, particularly if they know the reduction is only temporary."
That leaves the Federal Reserve as the economy's defender of last resort. In every recession since the 1930s, the central bank has helped spur a recovery by slashing interest rates to help spur borrowing and spending. But the Fed has held short-term rates at near zero for nearly three years, and it has flooded the financial system with over $2 trillion, yet the U.S. economy is barely moving ahead.
Fed Chairman Ben Bernanke, in a speech Thursday, hinted that the Fed may act at its regular policy-setting meeting next week. But there is little left in the Fed's monetary arsenal. One idea being discussed would be to shift the central bank's bond portfolio to longer-term maturities, helping to push long-term rates even lower. The Fed may also cut or eliminate the interest it pays banks to keep money in its vault in an effort to spur more lending.
But those moves would likely have limited impact. Businesses and consumers with good credit can already find plenty of cheap money to borrow.
More than four years after the housing market collapsed, record low mortgage rates have failed to revive sales and new construction. For unemployed workers, it's hard to make a mortgage payment no matter how far rates are cut. As struggling families lose their homes to foreclosure, those "distressed" sales depress the market even further.
"The big risk going forward is that the labor market in the U.S. doesn't pick up strongly enough, because that keeps the housing area under extreme pressure," said Michael Workman, a senior economist at Commonwealth Bank Of Australia. "Outside of the major cities things are terribly weak — unemployment rates are 15 percent or more."
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