On the Jobs Speech

by Reihan Salam

My latest column for The Daily is on President Obama’s call for a large-scale fiscal stimulus measure, and it’s pretty harsh. As I specify at the end of the column, I really hope that the president is closer to the mark than I am.

At the heart of the president’s proposed American Jobs Act is a $240 billion extension and increase in the size of the current payroll tax cut. The payroll tax impacts almost all working Americans, and it places a heavier burden on the poor than the rich. Slashing it might encourage at least some working Americans to spend more, particularly those who need the money least. 

There is, however, a great deal of empirical evidence suggesting that workers save the proceeds from temporary tax breaks, particularly people who aren’t optimistic about their future economic prospects. And remember that the payroll tax pays for Social Security. Money diverted from that program has to be made up with higher taxes in the future. As America ages, those higher taxes will be imposed on fewer workers to support more retirees. The math gets dicey very quickly. 

Or rather, the accounting math gets dicey. The political math is very attractive. If the Republicans fight a payroll tax cut extension, as they might, the president will skewer them for doing so. 

The president called for new spending on education and infrastructure. There is an excellent case for infrastructure spending, particularly if it’s part of a long-term plan that includes finding smart ways to pay for it. But as Alice Rivlin, President Clinton’s OMB director, has said on numerous occasions, infrastructure spending is not the best way to stimulate the economy in the short-term. President Obama seemed to acknowledge that fact last year when he said, “There’s no such thing as shovel-ready projects.” Somehow amnesia has taken hold.

I don’t oppose the idea of an infrastructure bank, but the crucial question concerns how we structure an infrastructure bank. The best version of the proposal I’ve seen thus far is in “Fix It First, Expand It Second, Reward It Third,” by Matthew Kahn, one of my favorite economists, and David Levinson, a transportation scholar at the University of Minnesota. I draw heavily on their proposal in a forthcoming project. 

According to the president, the nation must choose between tax breaks for millionaires and billionaires and putting teachers back to work. Given the amount of money that is wasted in the education sector, there is little reason to believe that a new federal windfall for public schools would be spent wisely. Cash-strapped school districts have finally started to cut spending wasted on bloated administrative budgets, lighting empty classrooms and much else — money that belongs in the classroom, yet somehow never makes it there. New money for schools will undoubtedly pump up unionized public school teachers, who tend to be enthusiastic Democrats. As the president and his closest advisers understand, firing up the Democratic base is crucial to his re-election prospects. 

I recognize that many readers will consider this an unfair characterization, and the president wasn’t terribly specific about his call for increased education spending. He wants to boost school construction budgets, which will presumably allow districts to shift funds that would have been spent on construction to other uses, e.g., meeting compensation demands. One could make a reasonable case for hiring large numbers of teachers if we could do so at low cost. Andrew Biggs recently offered insight into the question of teacher compensation:

 

Teachers claim to be underpaid because they receive lower average salaries than private sector workers with similar levels of education. (Our paper shows that, even if this is true, they more than make up the gap through generous benefits, but we’ll ignore that for now.) But note that the control variable here is the level of education — meaning, Bachelor’s degree, Master’s degree, and so on — and not the quality of education nor, more importantly, the ability or productivity of the worker.

In most public-private pay comparisons we can use the level of educational attainment as a proxy for individual ability (For instance, see our paper on federal pay). This isn’t because every college major has the same level of difficulty or that every college provides the same quality of education. It’s because a large number of different college majors are distributed across a large number of different occupations, so given an adequate sample size the inadequacies of education as a proxy for productivity wash out. The fit of the estimate isn’t as tight as if you had some better measure of employees’ ability (meaning, in stat-speak, that the R-squared value of the regression isn’t as high) but the results aren’t biased in one direction or the other.

But when examining teacher pay the problems with educational level don’t wash out: most teachers have degrees in education and most people with degrees in education work as teachers, so if an education degree signals lower ability or a less rigorous education — and Koedel’s paper and other sources indicate that’s the case — then regressions using education as a control variable may falsely show public school teachers to be underpaid.

Put bluntly, public school teachers enter college with below-average SAT scores, major in the easiest undergraduate course of study, take Master’s degrees in education that have no appreciable impact on teaching quality, and then wonder why they’re not as well paid as someone who got a Master’s in chemical engineering. They shouldn’t.

Somehow I suspect that Andrew Biggs won’t soon displace Diane Ravitch as the court intellectual of America’s teachers unions. 

I also made reference to President Obama’s proposed reform of the corporate income tax:

The president reminded us that very rich Warren Buffett thinks the rich should pay higher taxes, for which the Sage of Omaha has won great praise. Yet it is important to remember that Buffett, like all investors, pays corporate income tax through the companies he owns. These taxes eat into Buffett’s vast fortune, and that’s just fine with me. But corporate taxes also eat into the wages of workers. While the Congressional Budget Office assumes that 100 percent of the burden of corporate taxes fall on the Buffetts of the world, a conservative estimate is that at least 40 percent is borne by labor. 

The president did say that he wants to reform the corporate tax code, which is great news. But what kind of reform does he have in mind? Incredibly, the president used a jobs speech to make the case against “tax loopholes for oil companies.” To translate this into language we can all understand, the president is calling for increased taxes on drilling new oil and gas wells. This is despite the fact that we’ve only just unlocked vast amounts of domestic shale gas, an energy source that could reduce our dependence on oil imports and spark a jobs boom. If the central problem facing our country is that we have too many blue-collar jobs in the energy sector and that we rely too heavily on domestic energy sources, one could make a strong case for closing these tax loopholes. But if the opposite is true, as I think it is, this is a counterproductive step. 

I should acknowledge that I am increasingly of the view that expanding efforts to exploit shale gas is an issue of great importance, as I think it’s a complement to efforts to increase our reliance on nuclear power. Until very recently, I was persuaded by the idea that tax loopholes for oil companies were a bad thing — until I looked into the provisions in question. Were these provisions not in place, putting them in place now would be a very sensible stimulative measure in light of what we now know about cost-effectively exploiting domestic shale gas deposits. 

For an alternative talk on the president’s speech, I strongly recommend that you read David Brooks’s latest column. I always profit from reading David, and he found the president’s diagnosis and his prescriptions convincing. And he also raised a number of important points that I neglected, including Brooks’s central point that we’re facing a very dire economic situation and that bad ideas might be preferable to inaction. 

 

Suppose in the middle of the winter of recuperation the economy stops recuperating? Suppose instead of grinding forward, the economy starts sliding back? In these circumstances, do you still have the luxury of thinking about the long term? Don’t you have to try to reverse things here and now?

This is the problem the Obama administration is facing. Like everybody else, it has seen a sluggish economy come grinding to a halt. There is clearly now a significant risk of a double-dip recession. That would be terrible for America’s workers, fiscal situation and psyche. This prospect is enough to shock even us stimulus skeptics out of our long-term focus. It’s enough to force us to contemplate the possibility of another stimulus package.

David is not Polyannaish about the proposed American Jobs Act:

 

In short, the administration is putting forth a package to prevent a double-dip recession that may not come to pass with a series of measures that may not work.

Yet it’s hard to walk away. The prospect of a double dip is truly horrifying. What happens if next months job’s report comes in negative? Or the one after that? Believe me, Congress will be rushing to do something then.

Personally, my bottom line is this: I think the president has earned a second date. He’s put together a moderate set of stimulus ideas. His plan may not be enough to jolt prosperity, but it might maintain its current slow growth.

Read ‘em both if you can. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.