Local Commentary

Commentary

November 21

Economy needs long-term growth, not short-term boost Commentary Timothy F. Kearney

IT’S BEEN more than two years since the recession officially ended – on paper – in June 2009, but a persistently stubborn high unemployment rate has been a drag on a slow-growing economy. It’s no surprise it has given rise to disgruntled movements such as the Tea Party and Occupy Wall Street.

President Barack Obama has responded to the lack of jobs by proposing the American Jobs Act, essentially a second stimulus bill with an estimated $450 billion price tag. It’s true that government spending in the short run creates jobs, and this bill is no different. But the economy needs to be placed on a firm path of long-term growth in order to generate enough family-sustaining jobs.

The president’s economic team rightly recognizes that the economy suffers from weak demand. However, the administration has responded with a mismatched collection of temporary policies that try to spark permanent change. Economic history clearly shows that consumers and businesses alike make decisions based on the long-term outlook, not short-term incentives from Washington.

Consider consumer spending. To bolster weak consumer demand, the Obama plan calls for a temporary payroll tax cut. In fact, workers are enjoying a partial payroll tax holiday right now and, as economic theory predicts, are using the money to pay down debt or add to their savings. People consume based upon their permanent incomes and recognize that the temporary tax cuts eventually will be discontinued. It’s a good idea to improve consumers’ balance sheets, but it likely will fall short as an economic catalyst.

The bill also tries this same short-term relief for producers. There is tax relief for companies that hire new workers or increase wages, and for hiring veterans or long-term unemployed workers. These proposals fundamentally misunderstand the dynamics of the labor market. Businesses hire workers whose productivity contributes at least as much to the company as they are paid. If the company can afford to hire them based only on the tax incentives, these jobs will disappear once the tax breaks end. Businesses are unlikely to hire as much as the administration expects.

This mismatch also undergirds his $35 billion support for public-sector workers. While it’s being billed as support for emergency first-responders and teachers, it will enable states to keep fewer essential employees on the payroll. First responders, after all, rarely are the first workers to be laid off. With state and local governments struggling to find a sustainable size for their public-sector workforces, this sort of temporary subsidy merely postpones the inevitable.

Infrastructure improvements – such as building roads and water systems, rehabilitating public buildings and developing a government “infrastructure bank” – are envisioned through Obama’s jobs act. However, the last stimulus bill demonstrated that there aren’t many shovel-ready jobs that can be started immediately, as projects still must proceed through various permitting issues. While infrastructure spending is vital for the economy, it is not a likely source of immediate stimulus.

A very important social component of the American Jobs Act is the extension of unemployment benefits to the long-term unemployed. Preservation of the safety net is essential for people who find themselves unemployed through no fault of their own. But it’s important to recognize that safety-net spending does not really stimulate the economy. The unemployed can’t increase their spending beyond a bare minimum. If anything, their dollars will go toward low-cost goods, many of which are made abroad.

Much like the Tea Party before it, Occupy Wall Street reflects society’s unease over the lack of recovery from the recession. It is made up of different groups, ranging from anarchists to unions to the unemployed to the middle class. They don’t have a unified message yet, beyond a call to separate politics from money. Without a more concrete platform, it will be difficult for these protesters to break through to the voting public and have the same political success as the Tea Party, which championed no bailouts and less debt.

If this message vacuum is filled with a Woodstock-like image, an important opportunity will have been missed. The Tea Party showed that a leaderless revolution can bring change to Washington.

Occupy Wall Street has the opportunity to keep the mobilization of the public going.

Timothy F. Kearney is an assistant professor of business at Misericordia University in Dallas Township. He can be reached at tkearney@misericordia.edu.

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