Pro & Con: Does President Obama have the right strategy for job creation?

NO: Policies that alter after-tax incentives for business kill jobs. By Don Sabbarese President…

Georgia (Feb 9, 2010) — NO: Policies that alter after-tax incentives for business kill jobs.


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By Don Sabbarese
President Obama was right on target when he said in the State of the Union address in late January that “jobs must be our number one focus in 2010.”
But the Obama administration has got it all wrong when it comes to how. Raising taxes on banks and other big businesses, as Obama proposes in his new $3.8 trillion budget, may help with the budget deficit, but is not going to result in the creation of many new private-sector jobs or induce companies to invest.
If the government wants to use fiscal policy to help the economy, then the most effective approach is implementing permanent tax cuts.
In fact, what we need is for the government to stay out of the business of regulating the private sector and creating jobs. Increased spending by the government, including the administration’s new jobs bill, will not lead to sustainable job creation.
These well-intentioned measures will ultimately increase the cost of doing business for the private sector by eating into their after-tax profits.
What the private sector lacks and needs more than anything is renewed confidence in the economy. Businesses need as clear a view as possible of an economy that is on the mend and that is not changing the rules.
Policymakers must resist the temptation to pass any policy changes that may impair the willingness of businesses to invest in more capital and labor. At this moment, businesses would welcome less uncertainty.
Once the economy reaches a sustainable level of growth, then policymakers could revisit the more drastic policies the administration proposes — such as the EPA proposal on taxing carbon, cap-and-trade, health insurance reform and a new tax on large banks.
Delaying these policies would prove to be less destabilizing.
For the time being, the federal government should concentrate on fiscal and monetary policy solutions that enhance long-term economic growth.
One necessary condition for a recession to end, and for a recovery to take hold, is for businesses to have renewed confidence in the economy. And right now we do not have that.
As long as consumers and businesses have any lingering doubts about the sustainability of economic growth, they will remain cautious toward increased spending on capital and labor.
In tough economic times, as businesses switch to a “survival mode” of cutting capital and labor costs, an inertia sets in that is hard to reverse when things start to improve. The same holds true for consumers.
Although GDP growth is a positive sign that the worst is behind us, it is still far removed from the everyday decisions that small and large businesses make. Businesses are constantly monitoring and weighing the signals from their particular markets against the distant signals of the overall economy.
As a consequence, increased spending on their part will only come when they are convinced that the improvement in the broader economy is synchronized with their particular markets.
So the message to policymakers is to minimize policy changes that complicate business and consumer decision making. The economy will be better served by policymakers simplifying the regulatory and tax environment that the private sector must navigate through.
Massive stimulus spending financed with debt creates the expectations of higher taxes in the long term, which also begs the question of who is going to pay for this debt.
Major policy changes should remain on the back burner until they can be fully debated on their merits and when their passage will not prolong an already long recession and slow recovery.
Don Sabbarese directs the Econometric Center at the Coles College of Business at Kennesaw State University.


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