The American Jobs Act

I recently commented on a article posted on the Extreme Liberal's Blog. The article is entitled: The American Jobs Act Will Prevent A Recession -- Pass It Now!

Below is my response to the claim that the Act will stimulate "demand."

Thank you for a reasoned response.

If, as you say, a “business does take its cue from the markets” and responds exclusively to the “demand thing,” then by your own argument all the incentives in the American Jobs Act aimed at business owners (payroll tax cuts, a tax holiday for hiring new workers or raising employee wages, tax incentives for new investment, tax credit for hiring veterans, tax credit for hiring the long term unemployed and regulatory reforms and reductions) are worthless window dressing.

Thus, again by your own argument, the only useful measures in the President’s bill are those that increase demand in the economy (preventing layoffs of teachers, police and firefighters, modernizing public schools, modernizing roads, airports and waterways, expanding access to wireless, subsidized employment and job training, cutting employee payroll taxes and “allowing” Americans to refinance their mortgages at lower rates).

However, let’s examine these measures more closely. Preventing layoffs will not add new demand to the economy. It merely preserves current demand.

Modernizing and repairing infrastructure will add new demand to the economy only to the extent that new workers are hired for these projects. Any new demand will be over the very long term.

Even if half of the unemployed workforce found subsidized jobs and training as a result of the bill, new demand added to the economy could be at most 5%.

Payroll tax breaks and refinancing opportunities would increase the incomes of ordinary Americans by a few percentage points at best, but these measures would only add new demand to the economy to the extent that these ordinary Americans spend the increased income rather than save it for a rainy day.

In truth, neither you nor federal government planners can know what exactly ordinary Americans will do with this bit of extra income. They are as likely to hold it or to spend down debt, as to create new demand.

The only consequences of the American Jobs Act that can be accurately predicted are the amounts of money that will be distributed initially by the government to favored political cronies and constituents.

Of course, due to the fact that the bill is “fully paid for,” this money will have been taken from others in the economy in the form of taxes. As a result, those “others” will no longer be able to save or spend it. Thus, the effect on overall new demand will probably be nil.

All efforts by government planners to direct or out-guess buyers and sellers in the free marketplace are vain. All these efforts are eventually exposed as sops to favored constituencies and interest groups. This truth holds true no matter the party in charge of the government.