Muted Reaction to Jobs Plan

Last night the president laid out a $447 billion jobs plan which includes continuing the holidays on some existing tax cuts as well as adding some new employer-side cuts. More than half of the plan is focused on tax cuts while another $105 billion goes to infrastructure renovations including school modernization, transportation projects and rehabilitation of vacant properties.  

Payroll tax cuts are the plan’s central focus. It calls for reducing payroll taxes on the first $106,800 of individual earnings and is split evenly between employers and employees. It reduces the portion paid by workers next year to 3.1% from 6.2%. The current deal set to expire this year reduces payroll taxes by 2%.  

The best part is that businesses get the same 3.1% reduction on taxes they pay on the first $5 million of their payroll. The benefits are aimed squarely at small businesses that create most of America’s jobs. Additionally, the full 6.2% of the employer contribution can be waived on the first $50 million net increase in a company’s payroll, covering raises and new positions.

A study released yesterday is bound to get some attention as the Congress takes up the president’s job bill. The Ewing Marion Kauffman Foundation reports revealed in stark terms that net US job growth occurs only  through startup firms. The study entitled The Importance of Startups in Job Creation and Job Destruction, bases its findings on the Business Dynamics Statistics, a U.S. government dataset compiled by the U.S. Census Bureau. It reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs. And remarkably, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

 The study’s author, Tim Kane says that because startups, that develop organically, are almost solely the drivers of job growth, job-creation policies aimed at luring larger, established employers will inevitably fail. Such city and state policies are doomed not only because they are zero-sum, but because they are based in unrealistic employment growth models. Expect to see some dramatic changes in the way states and municipalities lure new business. 

While there was no good news on the jobs front, other economic reports this week were, on balance, more positive, and argued against the double dip threat. The Institute for Supply Management said their non-manufacturing composite moved six tenths higher to 53.3, which stands in stark contrast to the dearth of bad news in August. A reading above 50 indicates monthly growth and, because it is slightly higher than July, it also indicates acceleration in growth as the Christmas season approaches.  

Bloomberg reported that the Fed’s Beige Book prepared for the September 20-21 FOMC meeting indicates that there is no double-dip recession and that the economy continues to expand, although at a "modest pace." The report largely confirmed generally accepted assumptions regarding the economy. Consumer spending is limping along, largely on motor vehicle sales. Manufacturing is growing but at a slower pace than earlier in the year. Housing is still flat and depressed. Commercial real estate and construction activity is weak or little changed, but improvements were noted in several areas. Labor markets were generally steady, although some districts reported modest employment growth. As for inflation, the majority of districts reported fewer price pressures, but input costs continued to rise in select industries.

Exports rebounded a whopping 3.6% in July after dropping 2.2% in June reducing the nation’s trade gap from $51.6 billion to $44.8 billion. All three major components of petroleum, non-petroleum, and services shrank. The report was good news for manufacturers and for third quarter GDP. 

Whether the economy falls back into recession or continues at its current sluggish pace, job creation is not likely. Economists suggest that growth of at least 3 – 3.5% is required to create jobs at a pace capable of putting the nation’s 10% to 17% un- and under-employed back to work. The best instant polling available is provided by the capital markets and in short, investors see no catalyst in the president’s plan capable of providing that kind of jolt to the economy. As of this writing, the MSCI Total US Market Index is down 1.2% at 10:00 a.m. The S&P 500 is down 1.4%. The 7-10 year Treasury index is up .2%.

The president said last night there is no silver bullet, no quick fix for the mess this economy is in. While he is to be commended for specificity and a bipartisan spirit, his plan simply fell short of providing the kind of impact required to break the inertia, to inspire innovation and risk-taking. Temporary tax breaks infrastructure builds simply do not light entrepreneurial fires.  

Bold measures are needed and speeches before joint sessions of Congress are a great place to launch them. Here are just a few ideas we didn’t hear enough of. Clean and flatten the tax code and make it permanent. Pledge to stop using it as a political tool. Reduce regulations and pledge a leaner simpler regulatory environment for new and growing businesses. Allow corporations to bring their offshore profits home without taxes if they build domestic plants and create American jobs with the money. Fix Social Security by lengthening the retirement age, means-testing it, and ending the ability of Congress to tap it to ‘balance’ their budgets. Fix Medicare by giving the states more administrative authority, putting the patient back in control, and forcing insurance companies to compete.  

As the ball is passed to the Congress and to the elite group of six, we wait to see if our government of the people has what it takes to come up with ‘bold measures.’ Put simply, the reduction of the size and scope of their dominion. Can they possibly do this? Judging when and where the applause came from last night, one would seriously doubt the possibility. Unfortunately, failure to bring bold measures potentially means years and even decades of stagnation and growth well below American potential.