Obama Needs to Teach the Public how to Get Out of the Mess We’re in, But He’s Not

The President wants businesses that hire new employees this year to get $5,000 per hire, in the form of a tax credit. That will come to about $33 billion. It’s good step. He’s also supporting a cut in the capital gains tax for small businesses. That makes sense; after all, small businesses generate most jobs.

But here’s the problem. Both of these measures, and many of the other tax cuts he’s proposing, give ammunition to supply-siders who think the way out of this awful economy is simply to cut taxes on businesses. If a new jobs tax credit is a good idea, why not a cut corporate in income taxes? If it’s useful to reduce capital gains taxes for small businesses, why isn’t it useful to reduce them for all businesses?

The answer, of course, is that across-the-board supply-side tax cuts for businesses don’t increase the demand for the things businesses produce. They’re useful only to the extent businesses are confident consumers are out there, able and willing to buy. Carefully targeted — as are the cuts the President is proposing — they can give businesses an extra nudge to hire. But without adequate demand, they’re useless.

So what’s the President’s new proposal for boosting overall demand? Hmmm. Turns out, he’s not really proposing anything new on that score. (Some who watched his State of the Union the other night thought they heard him call for a second stimulus. Actually, he didn’t, and as far as I can tell he doesn’t plan to.) His political advisors are telling him to emphasize deficit reduction instead. And that’s what he did Wednesday night when he talked about a “freeze” on discretionary spending, and a “commission” to look for ways to cut the deficit. 

I can understand why Obama’s political advisors are pushing him in this direction. Many Americans borrowed too much during the boom years before the Great Depression, and now they’re paying the price. So they naturally analogize their own plight to that of the federal government and the economy as a whole. The government is too deep in debt, they reason. Logically, that means the only way out of the nation’s economic doldrums is for the government to mend its ways. The government has to reduce its budget deficit just like American families have to reduce theirs.  

This analogy is faulty, of course. If John Maynard Keyenes taught us anything, it’s that a federal budget is not at all like a family budget. In fact, it’s precisely because families have to pull in their belts that the federal government has to let its belt out. When consumers and businesses aren’t buying much of anything, the government has to fill the gap. That’s the only way to get jobs and get the economy moving again. Once the economy is percolating, the government can pull back. By then, tax revenues will soar, and the long-term deficit will shrink. (And yes, entitlement reform is probably necessary in the long term. But here again, it’s vitally important to separate the long term from the now.) 

But if the public learns the wrong set of lessons — that tax cuts for businesses are good, and deficit reduction starting now is good — there’s no hope for getting wise policies out of Congress. The debate is framed all wrong.

The President — any president — is the nation’s educator in chief. Everything he proposes contains an implicit lesson. The economic lesson President Obama ought to be teaching is that targeted tax cuts, mostly for small business, are good to the extent they give businesses a nudge toward creating more jobs. But businesses won’t begin to create lots of jobs until they have lots of customers. And that won’t happen until lots more Americans have work. The only way to get them work when businesses aren’t hiring is for government to prime the pump.

One final lesson I wish he’d teach: The best and fastest way for government to prime the pump is to help states and locales, which are now doing the opposite. They’re laying off teachers, police officers, social workers, health-care workers, and many more who provide vital public services. And they’re increasing taxes and fees. They have no choice. State constititions require them to balance their budgets. But the result is to negate much of what the federal government has tried to do with its stimulus to date.

We need a second stimulus directed at states and locales. I wish our educator-in-chief would say that loud and clear, explain why, and then do it.

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

2 Responses to "Obama Needs to Teach the Public how to Get Out of the Mess We’re in, But He’s Not"

  1. Kimberly   January 30, 2010 at 3:20 am

    Unfortunately, in the political atmosphere today, none of our representatives are listening to the voices of sanity. We are heading straight towards the double-dip.

  2. Curtis Henson   January 30, 2010 at 4:16 am

    The way to get out of the mess we’re in is for labor to humble to lower wages. We can’t “create” enough jobs. We need to “retrieve” jobs from China and India. But don’t expect a politician to tell labor to “get real.” That’s not a vote getter.The paltry amount of tax and stimulus being considered is comparable to dousing out a fire with gasoline. This can be done. But Washington hasn’t appropriated enough “gas” and they’re not dousing. They’re trickling. It’s exacerbating the problem.Government stimulus can only be effective in raising employment levels if it is enormous; if it goes directly to the unemployed via public works and if the labor force is sufficiently demoralized to accept it. At best it is a temporary unemployment abatement tactic until natural, private market employment rebounds. TARP was too small, went to the banks, and almost none of it made it to the people. Trickle down economics never made it to the people, so why should TARP?State and local governments need to consolidate the duplication at the top of their administrations and stop axing peasants at the bottom of their organization charts. I worked in State Government in the 80’s. What I saw was massive managerial duplication and gross overhead costs. That’s where the fat should be trimmed: Not by cutting teachers, firemen and police officers.