While bold action to rehabilitate America’s flagging economic climate is certainly necessary, Obama’s proposal cuts in precisely the wrong direction.

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When President Obama appeared before a joint session of Congress last week, he pitched his newest supposed economic panacea – the American Jobs Act – as a plan to “provide a jolt to an economy that has stalled, and give companies confidence that if they invest and if they hire, there will be customers for their products and services.”
 
Conservatives who’ve grown accustomed to tuning out the monotonous, torpid Commander-in-Chief largely ignored what they assumed was stimulus redux. But that may be a mistake given the desire expressed by some congressional Republicans to shed their reputations as reflexive obstructionists and be seen as “doing something” to improve the nation’s economic prospects. That temptation could lead to Obama’s latest quick fix getting more of a bipartisan hearing than it deserves.
 
While bold action to rehabilitate America’s flagging economic climate is certainly necessary, Obama’s proposal cuts in precisely the wrong direction. In virtually all instances, his ideas are either insufficient or actively destructive. Herewith are just a few examples of his plan’s wrongheadedness:
 
Payroll Tax Cuts – Last year, Obama successfully lobbied Congress to lower employee payroll taxes from 6.2 percent to 4.2 percent. While this measure – like virtually all initiatives that allow Americans to keep more of their own money – provides at least some economic relief, it provided little stimulative bang for the buck. For an average American receiving a paycheck every two weeks, the cut amounted to less than $40 per check, hardly enough to goose aggregate demand as Obama intended. And because the reduction wasn’t applied to employers’ payroll tax rates, it did nothing to change the calculus for job creation.
 
This new proposal would lower rates even further, dropping them to 3.1 percent and making up for the key deficiency of last year’s plan by also given the reduction to employers. That’s a marginal improvement, but it’s still riddled with shortcomings. The program is temporary, which means that businesses and workers can both count on the rates going back up in the near future. That will diminish much of whatever incentive for hiring the program creates. And reducing payment of the payroll tax (which funds Social Security and Medicare) only hastens the coming insolvency of the entitlement state.

Infrastructure – Obama proposes about $100 billion in infrastructure spending as part of this plan. Infrastructure can often be an appropriate use of public money, but it can either be effective or it can be a jobs program – it can’t do both. The most efficient infrastructure programs move quickly and are relatively affordable. But using infrastructure spending to gin up employment numbers means creating an incentive to slow projects down (thus keeping workers employed longer) and overpay (particularly to curry favor with unions). What’s more, Obama sold the original stimulus in 2009 partially on the notion that he was putting 400,000 people to work in “shovel-ready jobs” (which he later admitted didn’t exist) in the biggest investment in American infrastructure since the Eisenhower Administration. That obviously failed to have a catalytic effect on the economy. It’s unclear why the president believes a retread would be any different.

“The Bill is Paid For” – Throughout his speech to Congress, Obama repeatedly claimed that “everything in this bill will be paid for.” Later in the speech, he tipped his hand to reveal that what he really meant by that statement was that the congressional “super committee” already tasked with finding $1.5 trillion in cuts to the federal budget would have to do that work for him. Then, feeling the pressure to act, his administration proposed earlier this week that the nearly half a trillion dollars in spending be paid for by higher taxes on income and capital gains, including destructively reducing the deduction for charitable contributions.

Mortgage Refinancing – Obama also proposes that the federal government provide financial assistance to help refinance mortgages to market rates, keeping Americans who would otherwise face foreclosure in their homes. While this initiative is no doubt well intended, it’s bad economic policy. The Obama Administration already tried it once, spending $75 billion on the Making Home Affordable Act in 2009. But, as that program proved in its first year – when more than 40 percent of its participants ended up being kicked out – no amount of fiscal legerdemain on Washington’s part can make a bad mortgage good. Markets will have to clear before the housing sector recovers – and that means getting people who can’t afford ownership into rentals and letting those who have prudently saved their money take advantage of the buyer’s market in real estate.

Police, Firefighters, and Teachers – Finally, Obama is pledging $35 billion to save the jobs of (or hire) police, firefighters and teachers. All three of these classes of public servants provide invaluable services to their communities, but giving them federal subsidies only creates perverse incentives for the state and local governments that employ them. Many in these ranks enjoy exorbitant pensions and/or health care benefits, making them needlessly costly to taxpayers. In addition, many politicians faced with belt-tightening put these sympathetic groups on the chopping block first, hoping that the public outcry will lead to broader support for new taxes. In essence, Obama is underwriting both of those destructive practices.
 
In the end, the president is thinking too small. Rather than nibbling at the edges of payroll taxes, he should propose broad tax reform that lowers rates and broadens the tax base. Rather than siphoning off funding from Social Security and Medicare, he should be putting those programs on sound, market-based foundations for the next generation. Rather than pumping up public spending, he should be galvanizing private-sector ingenuity. And rather than subsidizing ravenous public unions, he should be forcing state and local governments to carry out the same fiscal self-discipline as families throughout the nation. But the president’s plan does none of that. And thus it doesn’t deserve passage.