David Stockman Criticizes Obama's Jobs Plan, Other Economists Cheer

Economists differ about the long term effectiveness of Obama's jobs plan.

September 8, 2011, 5:05 PM

Sept. 9, 2011— -- President Obama's $447 billion American Jobs Act is getting mostly solid marks from business experts and economists, who worry that a divided Congress may be unable to pass anything meaningful in time.

The president's plan would eliminate payroll taxes for companies that add workers or increase wages of current workers, but that benefit is capped to the first $50 million in payroll increases. The plan has a $4,000 tax credit for employers who hire long-term unemployed workers, plus a "returning heroes" hiring tax credit of $5,600 to $9,600 for each unemployed vet hired.

Read Text of President Obama's Speech Here

The proposals include reforming the unemployment insurance program, a $50 billion extension in unemployment insurance to prevent 5 million people looking for work from losing benefits and state assistance for wage insurance.

Small businesses would get a 50 percent cut in the first $5 million in payroll taxes. The White House said 98 percent of businesses have payroll below that threshold.

Political analysts say Republicans may be in favor of the tax cuts in the president's proposals, but will oppose the parts of the $447 billion plan that call for new government spending. The spending measures include a $50 billion investment in infrastructure, a bipartisan National Infrastructure Bank and aid to state governments.

Cecilia Rouse, economics professor at Princeton and former member of President Obama's Council of Economic Advisers, said the president is proposing a "sensible" package of strategies while the private sector continues to struggle. Rouse said she was "particularly pleased" to see an extension in unemployment insurance for an additional year.

"They are a critical form of assistance for so many families as well as one of the fastest and most effective ways of helping to increase economic activity during a downturn," she said.

Rouse said the proposed employment tax cuts, for both employers and individuals, are warranted and investments in infrastructure "just make sense" given the numbers of unemployed construction workers and the low rates at which the federal government can borrow. Further state aid will help the economy a great deal given that public sector employment has been unusually hard hit in this downturn.

But she would have liked for Obama to have proposed more innovation for services that help the unemployed find jobs.

"While I understand that investments in these programs will not generate jobs, per se, right away, reforming them will likely prove vital for ensuring that workers can quickly find good jobs once the recovery is underway in earnest," Rouse said.

David Stockman, former director of the Office of Management and Budget under President Ronald Reagan, was skeptical of the plan.

"This should scare the living daylights out of investors--it's just more Keynesian poison," Stockman said. "Obama lectured us about the simple math, but the part of that he still doesn't get is that Uncle Sam is broke, and that we can't afford one more dime for his stimulus 6.0 plan."

Stockman said there is no multiplier effect in a "debt-saturated economy" like the current one. That is, the effect of a change in taxes will not be multiplied in other parts of the economy, say consumer spending.

"The money will go through the economy in a flash and leave nothing behind except a half-trillion dollars of more debt to our children," he said.

Stockman called the $175 billion payroll tax holiday for workers "the Big Fiscal Lie."

"Unfortunately, workers need to pay every dime of currently scheduled taxes to fund Social Security and the other big government programs their representatives keep supporting," he said. "You don't get extra pocket money for Happy Meals you shouldn't have and Under Armour you don't need just because someone is trying to save a job at 1600 Pennsylvania Avenue."

Phillip Swagel, former assistant secretary for economic policy at the Treasury Department from 2006 to 2009 and former chief of staff at the White House Council of Economic Advisers, said the President gave two speeches in one: economic proposals that could "modestly" boost the U.S. economy, followed by "a campaign stump speech." He called it "an unusual way to bring the country together."

"The proposals would be most helpful if they are connected to a credible fiscal adjustment over time," said Swagel, professor in international economic policy at the Maryland School of Public Policy. "So have some tax cuts along the lines of what President Obama proposed and at the same time set out a way to reform entitlement spending over time. That will be part three of the speech...only that we have to wait a week to find out. So this is an incomplete proposal."

However, Swagel said the tax cuts on wages and on investment would be helpful. Swagel said he is waiting to see further details, but he suspects there will be bipartisan support for some form of the proposals, so long as it is matched to a credible program to deal with the country's "long-term fiscal imbalance."

Peter Hooper, chief economist with Deutsche Bank Securities, said the proposed package costs about 50 percent more than was expected, including a number of measures that could be effective in creating jobs that would normally attract bipartisan support.

"At roughly 3 percent of GDP, if passed intact, it would fill a good deal of the over 5 percent of GDP fiscal drag currently built into fiscal policy for [the 2012 fiscal year]," he said.

However, according to Hooper, the initial reaction from key elements of the Republican side of the House suggests that chances of passage of the proposals intact are slim.

"We should get some of this, which will help, but probably not enough to make big difference to a weak economy," Hooper said.

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