Barack Obama knows that his 2012 re-election chances may hinge on his ability to tackle unemployment which has remained stubbornly above 9%. With the US purse strings in the vice-grip of a US Congress controlled by a Republican Party with a deficit fetish, he knows better than to expect help from this quarter.
If more fiscal stimulus is impossible, whether because of real funding constraints, as in Ireland, or because of purely political constraints, as in the US, then the next best approach is to get more bang from the government buck. It is this concept, formally known as the ‘balanced budget multiplier’, that underpins President Obama’s latest jobs plan.
The idea is to re-balance taxes and spending in favour of job creating activities without adding a single cent to the deficit. In fact, if the re-balancing act is successful in boosting growth and jobs, the deficit should actually narrow.
Obama’s ‘American Jobs Act’ is based on five key principles:
– Boost demand in the short term by putting more money in the pockets of those who need it most: ordinary working and middle class families who need to spend a bigger proportion of their income just to make ends meet.
– Invest in competitiveness enhancing infrastructure improvements that create jobs during construction.
– Make it easier and cheaper for small and medium sized businesses to hire new staff.
– Ensure sufficient resources to prevent job losses for front-line public servants.
– Finance job creation measures through progressive tax reform.
Billionaire Warren Buffet recently highlighted the gross unfairness in the US tax code which sees his tax rate lower than that of his secretary. Among the measures proposed to finance the Jobs Act is a new so-called ‘Buffett rule’ which would ensure that millionaires pay tax rates at least as high as ordinary families.
Many will argue that such a plan is impossible in Ireland while we are wards of the troika. The EU-IMF deal is a stringent, mutually agreed programme of austerity and reforms on which government funding is conditional. However, so long as immutable headline targets are met (such as a 3.6bn adjustment for 2012) there is ample scope for ‘renegotiation’ so long as the political will is there.
There is no reason why the Irish government could not, for instance, secure agreement from the troika for a progressive wealth tax to bring down the deficit while financing job creation measures. While many ordinary people are struggling, the evidence shows that there is still a huge amount of wealth in Ireland – it’s just less conspicuous than it used to be.
In fact, one of Obama’s new proposals, the creation of a national infrastructure bank, already forms part of FG-Labour’s Programme for Government. Such a development bank could be financed by leveraging that part of the National Pension Reserve Fund that has not yet been committed to the banking system.
With Irish unemployment above 14%, and not expected to fall significantly until 2013 at the earliest, the size of the challenge we face is formidable. The long-term unemployed can quickly become the long-term unemployable as skills are lost and people become more remote from the workforce. There is a real danger that persistent long-term unemployment becomes endemic and structural.
The Irish government’s recent ‘jobs initiative’ is evidence enough of what is possible, but the challenge at hand requires a far more ambitious range of measures.
Obama’s plan will not likely pass Congress, and if it did, it might not be enough to secure his re-election, but it does provide an ambitious, yet feasible, template for fiscally neutral, government driven job creation.