If Washington can’t do anything about jobs and infrastructure now, can it ever do anything about jobs? I think the answer is NO!
Global financial markets continue to expect the U.S. Federal Reserve to pull a rabbit out of its hat. For example, global stocks rallied on Wednesday, August 31, on the release of minutes from the Fed’s August 9 meeting that showed some members of the Fed’s Open Market Committee wanted to do go beyond the Fed’s promise to keep rates exceptionally low through the middle of 2013. Markets read that as a sign that the Fed would do something dramatic if problems deepened. (And, boy, did they deepen on Friday with news that the U.S. economy hadn’t added any jobs in August.)
But as Bullwinkle J. Moose repeatedly said when he pulled a snarling bear instead of a cuddly bunny out of his hat, Wrong hat.
Hasn’t anybody actually read through to the end of Fed chairman Ben Bernanke’s August 26 Jackson Hole speech? (That’s a purely rhetorical question, of course.)
Six paragraphs from the end he said, “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Faster economic growth, Bernanke went on, depends on fiscal policy, and the design of intelligent tax and spending programs. We can’t grow our way “out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face,” he said even closer to the end of his speech.
In other words, we’re in deep trouble. After all, we’re talking about the United States, a country where the President and the Speaker of the House have trouble scheduling a major Presidential speech on jobs. (That speech is now set for September 8.)
How dysfunctional is fiscal policy in the United States right now?
Let’s use the fight over extending funding for transportation as an example.
You’d think this would be an easy one.
Transportation legislation, set to expire on September 30, provides money to build and repair highways and bridges and to fund mass-transit projects. The expiring legislation also authorizes the government to collect the current 18.4 cents a gallon gas tax—which goes into the Highway Trust Fund to pay the federal share of highway projects.
In the Senate Democrat Barbara Boxer (California) and Republican James Inhofe (Oklahoma) have proposed a two-year, $109 billion extension of the act.
In the House Republican John Mica (Florida) has proposed a version of a reauthorization bill that would cut funding by about a third.
Frankly with the unemployment rate at 9.1% and the economy threatening to tip back into recession, I find the idea of cutting spending on transportation puzzling. This is spending that keeps people working and that’s one thing the economy needs right now. If you’re so gung-ho about cutting spending right now (and as much as I think we do need a deficit reduction plan in the mid-term, I think we need spending to stimulate growth now), there are lots of other places to cut government spending without costing jobs. Scaling back or eliminating tax breaks to companies would be one place to start. A recent study by the Institute of Policy Studies found that 25 of the 100 highest-paid corporate executives in the United States received more in pay last year than their companies paid in taxes. And how did companies such as Verizon, General Electric, Boeing, and eBay pull off this trick? By juggling revenue and expenses between the United States and subsidiaries operating in countries that the U.S. Government Accountability Office has characterized as tax havens.
As you’d expect, the political rhetoric in Washington is flying fast and furious. Democrats say that the House bill would cost 500,000 highway jobs and 100,000 additional transit jobs. Republicans say the Senate bill is yet another instance of runaway government spending. I think the Democrats have the better of this argument: The experience of the Great Depression says that when the problem with the economy is a slump in demand, then government spending that creates demand is an effective tool of fiscal policy.
But what drives me nuts about this debate isn’t the differences between the Democratic and Republican plans but their similarities. The vision of both sides is so crabbed, so pessimistic, so limited that it’s hard to see any hope for fiscal policy leading the country out of recession in the way that the Fed’s Ben Bernanke pleaded for in his Jackson Hole speech.
Take the federal gasoline tax. The 18.4 cents a gallon tax hasn’t been raised since 1993. In September 1993 regular gasoline sold for $1.05 a gallon so the federal tax represented 17.5% of the price of a gallon. In August 2011 regular sold for $3.60 a gallon so the tax represented just 5.1% of the price of a gallon.
Despite this, despite projections that show the Highway Trust Fund facing insolvency in 2012, despite strong arguments (agree or disagree, up to you) that gradually raising the price of a gallon on gas through taxes would be one way to reduce U.S. dependence on oil—despite all this—both President Barack Obama and the Congressional Republican have ruled out any increase in the federal gas tax. The vague plan is to make up the shortfall in the trust fund by attracting more private-sector funding. (Of course, if the government has to give away subsidies to attract this private funding, it wouldn’t count as a tax. Although it would be spending that adds to the deficit.)
If you can’t get an increase in the federal gas tax through Congress, you can’t increase taxes of any sort, I’d argue. Scratch that tool of fiscal policy then.
I’d also argue that if you can’t get a transportation bill—with a reasonable increase in spending—through Congress, you can’t get any spending bill passed on Capital Hill at all. And that would scratch another big tool of fiscal policy.
Even if you don’t buy the short-term jobs creation argument, I don’t see how you can ignore the long-term link between infrastructure spending and economic competitiveness. While the United States is debating an inadequate bill on transportation spending, our biggest economic competitor China is building airports, expanding its railway freight network, and adding thousands of miles of roads. U.S. ports fall further behind Hong Kong and Singapore and Vancouver by the day—and it’s not clear that any U.S. port will be ready for the bigger ships that will come sailing through an expanded Panama Canal. The 2009 “Report Card for America’s Infrastructure” by the American Society of Civil Engineers gave U.S. roads and bridges a grade of D- and the country’s transit systems got a D. According to the report 36% of major urban highways were congested—that means goods and people are sitting in traffic raising the cost of doing just about everything—and 33% of major roads were in poor or mediocre condition.
And yet the bill introduced by Republican Mica, the chair of the House Transportation and Infrastructure Committee, proposes less spending in the reauthorization than when the transportation legislation was first passed in 2005. That year’s bill authorized $286.5 billion over five years. Mica’s bill would authorize $230 billion over six years.
Boxer’s Senate bill at $109 billion over two years provides more money per year but it’s not even guaranteed to pass the Senate, let alone clear the House. Some Senate Republicans have threatened to block the bill unless all spending on highway beautification and bicycle transportation is stripped out of the bill. Besides the question of what these Senators have against bicycles, you’ve got to wonder after Republican performance on legislation to raise the debt ceiling if these are real objections or merely efforts to delay the bill that would be followed by other objections.
And this, spending on transportation, ought to be an easy piece of fiscal policy to get right. Jobs in a recession and long-term investment in infrastructure to increase competitiveness—it’s hard to imagine any fiscal initiative with more going for it.
If Congress can’t get this one right, I think Fed chairman Bernanke can forget about his call for intelligent fiscal policy to increase the productivity of the economy.
The trumpet will have sounded and no one in Congress will have answered the call. I’m not holding my breath waiting for anything visionary or dramatic from the President in his September 8 speech on jobs either. Small thinking for big challenges seems to be the flavor of the year in Washington.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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