President Obama is set to give his jobs speech tonight. In it, he will outline a series of proposals to stimulate job creation. I don't know what these are yet, but if I was appointed philosopher-king, the following would be my ideas to stimulate near-term economic activity and hiring while not exacerbating our long-term economic problems:
Employ construction workers by investing in infrastructure. The most obvious hole in economic activity is the smoking crater left by the collapse residential real estate investment. Construction employment has fallen from over 7.5 million in 2007 to about 5.5 million today. Of course with housing inventories well in excess of normal levels and with consumers overburdened by mortgage debt, re-inflating the housing bubble is not an option. The government could put construction workers to work by investing in infrastructure like roads, bridges, commuter rail, power infrastructure, broadband infrastructure, ports, etc. The focus should be on shortening commuting times, reducing trade friction and supporting export infrastructure…stuff that should be done anyway. Do not focus on controversial and dubious items like intercity high speed rail and solar power. The goal should be to employ about 1 million additional construction workers over the next couple of years. After two years or so the housing market will clear and the pace of infrastructure spending can be reduced. Yes, environmental and other types of reviews may need to be streamlined to make projects "shovel ready" this time.
Stimulate domestic investment by reforming corporate taxes. There is clearly an imbalance between the perceived return on business investment made abroad versus domestically. We need to change that. My solution would be to reform the corporate tax code by (i) leaving the rate where it is, at 35%, (ii) make worldwide earnings subject to the tax (now it is only taxed when brought back to the United States), (iii) make investment in research, development and capital expenditures made in the United States immediately tax deductible (as opposed to depreciated over several years) and (iv) make dividends tax deductible. The design here is to reward investment in the US while discouraging the hoarding of cash on corporate balance sheets (particularly in foreign banks) or squandering cash on empire-building acquisitions. Corporations should either invest their cash in the US or pay it out as dividends. If a corporation wants to make an acquisition, it should subject itself to the discipline of the financial markets and issue debt or equity. Because this reform encourages actual investment by businesses and would eliminate the double taxation of dividends, there would no longer be a need to give preferential treatment to dividends and capital gains for personal income taxes. In addition, the tax difference between corporations and "flow-through" business entities like LLCs would be dramatically reduced, ending a major distortion in the tax code.
Remove barriers to domestic energy production. The oil and gas industry is running at over 95% of capacity, the most of any domestic industry, so it needs more investment now. We need to remove barriers to offshore and onshore drilling and "fracking" and to encourage nuclear power and wind power, where appropriate. Within the energy complex we can encourage demand for domestic energy by putting a tariff on imported oil, which would also help fight the biggest source of our chronic trade deficit. The long term goal would be to move to a straight carbon tax. We can also raise revenue to offset other measures encouraged herein by eliminating the preferential tax treatment of oil and gas investment, which isn't needed given the tight capacity and proposed tariff. The tariff on oil prices would help encourage a transition to more fuel-efficient automobiles, whether hybrid or electric.
Encourage hiring by permanently cutting the payroll tax. We can increase the return on labor to businesses by permanently eliminating the employer side of the payroll tax (which is 6.2% of wages). It needs to be a permanent cut because businesses are otherwise rational and won't hire based solely on a temporary cut. The long term goal would be to replace the payroll tax (a regressive tax on hiring) with a carbon and/or consumption tax (a regressive tax on consumption). The cut would be partially offset by letting the temporary 2% cut in the employee-side of the payroll tax expire as scheduled.
Stand up to currency manipulators. There is no reason that an innovative, productive economy like the United States has to run a persistent trade deficit. We are being manipulated by the central banks and sovereign wealth funds of East Asian and OPEC nations, plain and simple. The inflow of these excess savings must be matched by an equal trade deficit, artificially suppressing American manufacturing. For example, there is no reason that manufacturing of high tech goods for American companies, which requires relatively little labor, should be done in Asia and not at least mostly in the United States. We are needlessly allowing excess capital formation outside of our borders. While I think the corporate tax reform mentioned above will help in this regard, we should also explore a wider array of "sticks" like currency interventions, tariffs and capital controls in addition to diplomatic "carrots" like trade deals in seeking to promote trade balance. (Our trade deficit is currently 4% of GDP.) I know that such a proposal will spark warnings of "trade wars", but in reality other countries use these types of tools all the time (Switzerland did this week) and if they are used to negotiate an end to market interference by the other country, there should be no long term repercussions.
Stop encouraging inflation. One of the biggest fallacies in all of economics is that you need positive inflation for the economy to work properly. It is absolute hogwash. Prices were basically flat for the hundred years prior to World War I and the US economy grew faster than ever. All inflation does is transfer purchasing power from ordinary people to the elites who know how to profit from inflation in the financial markets. Stopping inflation would also have the benefit of making finance boring again, which would stop the drain of talent and capital from the real economy toward non-productive endeavors like designing the latest hedge fund trading algorithm or speculating in commodities. While targeting zero inflation wouldn't create jobs per se, it would lift the real income of American workers, since prices have been rising faster than wages. I frankly don't understand what the Fed has been trying to accomplish lately. The dollar is already at the bottom of its long term trading range and gold prices are soaring. Asset prices are generally pretty expensive. It's time for a new approach.
All of these ideas are incremental steps toward what I think should also be America's new (or at least modified) long term economic strategy. I also include some revenue offsets designed pay for these programs in a way that would not harm the economy and would also serve our long term goals. I realize that some of these proposals cut strongly against the conventional "wisdom", and I don't care. The long term goals are to get more Americans working, to make sure they get paid more by their employers, to produce more domestic investment and to pay for it with more domestic savings. It can be done. We shouldn't expect miracles, however. The economy is going to be abnormally weak for some time to come. This is the time, however, that we can band together to build a long term foundation for strong growth and general prosperity.