With the U.S. economy spinning its wheels, demands are growing for President Obama to “do something.” But considering the nature of the slump and the political dynamics in Washington, there may be very little he can do to get the economy out of the ditch.
Obama doesn’t make his life any easier when he makes speeches that include no important initiatives, as he did on Aug. 8. Note to president: If you are going to go on TV, you better have something to say.
Instead, Obama announced one new program—a tax credit for businesses that hire unemployed veterans. My Tax Policy Center colleague Bob Williams figures the plan would subsidize the hiring of 12,000 to 50,000 vets. Companies would happily take the credit for hiring somebody they would have hired anyway, or for hiring a vet instead of a non-vet. But, either way, the number of new jobs created by this initiative would be tiny.
What could a more aggressive Obama do? Voices on the left, such as Paul Krugman, argue that the president should push for a major new stimulus package, including more public works spending. The right wants more tax cuts. Leaving aside the question of whether either could pass Congress (they couldn’t), is either the right cure for what ails the economy?
Growth in the U.S. has stalled for several reasons. Banks still are not lending to domestic borrowers. In part this is because they are stuck with billions of dollars in non-performing or troubled real estate loans and are terrified of taking on more bad credits. Big public companies are swimming in cash, but won’t invest in either new equipment or new workers until they see new customers. And construction remains dead in the water, with more than 4 million existing homes still on the market and millions more close to foreclosure.
These factors have been with us for a couple of years. What is new is a toxic wave of uncertainty driven partially by the U.S. fiscal mess and more so by deep troubles in the Eurozone.
What’s the cure? It is hard to see how more tax cuts would do the trick. Small businesses need orders and access to credit, not tax breaks. And there is no reason to believe that having even more cash sitting around will encourage big businesses to invest.
What about tax breaks for individuals? Obama wants to extend this year’s payroll tax holiday. That may help keep consumer demand afloat. But since we don’t know what households have been doing with the extra cash they got this year, it is hard to predict what will happen if the holiday is extended.
What about a big new stimulus plan? There is a good argument to be made that the U.S. needs an infrastructure upgrade and that such projects would provide a real boost to the construction industry. But we learned in 2009 and 2010 that there are just not enough “shovel-ready” projects out there to provide any kind of immediate boost to the economy. These projects will take years to roll out.
In 2009-2010, Obama made cash available to hard-pressed states in an attempt to keep state employment going. But a wave of GOP governors is enthusiastically laying off state workers. A check from Obama won’t change their minds.
So what can government do? It can work with banks to finally get all those bad mortgages off their books. Until those loans are written off, the absence of lending will continue to be a dead weight around the economy’s neck. The Obama administration has failed repeatedly to resolve this mess. But with banks again demanding more liquidity from the Fed, this may be a good time for a quid pro quo.
Government can also help reduce uncertainty by addressing its fiscal issues in a responsible way. You knew I’d say that.
But today’s biggest problem today may be the stability of Europe. And that crisis is far beyond the reach of the U.S. government. Bottom line: There are steps Obama can take, but they mostly have to do with the dirty work of bank regulation. And that just isn’t very sexy.
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