President Obama spoke today at the Brookings Institute about new initiatives to spur job creation. Below are key parts of the speech and my reaction to it. The full speech can be read here.
“It wasn’t long after that meeting, as we shaped this economic plan, that we began to see some of these forecasts materialize. Over the previous year, it was obvious that folks were facing hard times. As I traveled across the country during the long campaign, I would meet men and women bearing the brunt of not only a deepening recession, but also years — even decades — of growing strains on middle class families.
“But now the country was experiencing something far worse. Our gross domestic product — the sum total of all that our economy produces — fell at the fastest rate in a quarter century. Five trillion dollars of Americans’ household wealth evaporated in just 12 weeks as stocks, pensions and home values plummeted. We were losing an average of 700,000 jobs each month, equivalent to the population of the state of Vermont. That was true in December, January, February, March. The fear among economists across the political spectrum…was that we were rapidly plummeting towards a second Great Depression.
“So, in the weeks and months that followed, we undertook a series of difficult steps to prevent that outcome. And we were forced to take those steps largely without the help of an opposition party, which, unfortunately, after having presided over the decision-making that had led to the crisis, decided to hand it over to others to solve.”
The political interests of the opposition party are usually at odds with the economic interests of the country. That is often the case regardless of which party is in power.
Nothing would create more new GOP seats in the Congress than would double-digit unemployment come November 2010. Still, in times of crisis — and yes, we faced an economic crisis — the opposition should rise above political games and put the interests of the country first.
It is important that people remember just how precarious our economic position was a year ago. Since efforts to stabilize the situation have been effective, there is a tendency to say it was all overblown and exaggerated back then. That is simply not the case.
“We acted to get lending flowing again so businesses could get loans to buy equipment, and ordinary Americans could get financing to buy homes and cars, to go to college, and to start or run businesses. We enacted measures to stem the tide of foreclosures in our housing market, helping responsible homeowners stay in their homes and helping to stop the broader decline in home values, which was eating away at what tends to be a family’s largest asset.”
Not doing so great on getting loans to flow to businesses. The big question — an “unknown unknown,” to use former Secretary of Defense’s phrase — is how much lending to businesses would have been down in the absence of action.
Efforts to stem the tide of foreclosures have been more successful, but have the air of kicking the can down the road. While the number of foreclosures has stabilized, the number of delinquencies continues to rise. A second wave of foreclosures is likely.
“To achieve this, and to prevent economic collapse, we were forced to extend assistance to some of the very banks and financial institutions whose actions had helped precipitate the turmoil. We also took steps to prevent the rapid dissolution of the American auto industry — which faced a crisis partly of its own making — to prevent the loss of hundreds of thousands of jobs during an already fragile, shaky time. These were not decisions that were popular or satisfying; these were decisions that were necessary.”
The speed of getting GM and Chrysler out of bankruptcy was stunning, and prevented a huge amount of collateral damage. Now it is left to be seen if they can effectively compete with the likes of Ford (F) and Toyota (TM). So far, Chrysler seems to be failing that test, and GM, while doing somewhat better, is not out of the woods.
The TARP program turned out to be a big success. Not only did we avoid the massive damage that would have occurred if Citibank (C) and Bank of America (BAC) had collapsed right on the heels of AIG (AIG), but the banks have repaid most of the funds with interest. The bank portion of the TARP actually looks like it will turn a profit, although losses at AIG and the auto makers will more than offset those gains.
Still, not all of the $700 billion was deployed and most has come back. I just wish we had gotten better terms on the deal. We taxpayers took a huge risk, but are getting pretty low returns.
To avoid moral hazard, any investments by the government should be on onerous terms. The government has no legitimate interest in protecting any individual shareholders’ (or bondholders’) investments. It does have a legitimate interest in seeing that big, systemically important financial institutions do not go belly-up, particularly in a disorderly way.
“Now, even as we worked to address the crises in our banking sector, in our housing market and in our auto industry, we also began attacking our economic crisis on a broader front. Less than one month after taking office, we enacted the most sweeping economic recovery package in history: the American Recovery and Reinvestment Act.”
Unfortunately, it was watered down and really too small for the enormous job it was meant to address.
“The Recovery Act was divided into three parts. One-third went for tax relief for small businesses and 95 percent of working families. Another third was for emergency relief to help folks who’ve borne the brunt of this recession.
“We extended or increased unemployment benefits for more than 17 million Americans; made health insurance 65 percent cheaper for families relying on COBRA. And for state and local governments facing historic budget shortfalls as demand for services went up and revenues went down, we provided assistance that has saved the jobs of hundreds of thousands of teachers and public school workers, firefighters and police officers.
“The last third of the Recovery Act is for investments to put Americans to work doing the work that America needs done: doubling our capacity in renewable energy like wind and solar; computerizing medical records to save money and lives; providing the largest boost to medical research in history; renovating classrooms and school laboratories; and upgrading roads and railways as part of the largest investment in infrastructure since the creation of the Interstate Highway System half a century ago.”
All three parts were needed, but it would probably have been more effective, and left more of a lasting impact if it had been more like 15% to part one and 45% towards the last infrastructure related part. However the trade-off would have been that the effect would have been slower in coming.
The first part is all but spent, as is a good deal of the second, emergency relief part. Most of the infrastructure spending part will come in 2010. Given the crumbling state of our national infrastructure, more will be needed.
“And even as the Recovery Act has created jobs and spurred growth, we have not let up in our efforts to take every responsible action to get the economy growing and America working.
“This fall, I signed into law more than $30 billion in tax cuts for struggling businesses, extended an effective tax credit for homebuyers, and provided additional unemployment insurance for one million Americans. And the Treasury is continuing to adapt our financial stability plan, helping to facilitate the flow of small credit to small businesses and families. In addition, we’re working to break down barriers and open overseas markets so our companies can better compete globally, creating jobs in America by exporting our products around the world.”
The effectiveness of the homebuyer tax credit is debatable, particularly in “bang for the buck” terms. Extending it to move-up buyers was a huge mistake, which simply adds to its costs without doing anything to reduce outstanding housing inventories, and very little to help job creation.
Job creation is key since it leads to greater household formation (i.e. gets recent grads out of their parents’ basements and into places of their own). Greater household formation is needed to really bring the excess supply of housing down, and thus reduce the long-term pressure on housing prices.
“Now, partly as a result of these and other steps, we are in a very different place today than we were one year ago. We may forget, but we’re in a very different place. We can safely say that we are no longer facing the potential collapse of our financial system and we’ve avoided the Depression many feared. Our economy is growing for the first time in a year, and the swing from contraction to expansion since the beginning of the year is the largest in nearly three decades.
“Finally, we’re no longer seeing the severe deterioration in the job market that we once were. In fact, we learned on Friday that the unemployment rate fell slightly last month. This is welcome news, and news made possible in part by the up to 1.6 million jobs that the Recovery Act has already created and saved according to the Congressional Budget Office.”
The number of jobs saved is very hard to measure accurately, but is very important. It looks like we have slowed the layoff problem — now fewer people are entering the ranks of the unemployed — but we still have a big and growing problem with job creation.
This can be seen in the duration of unemployment numbers. Last month, the number of people out of work for fewer than five weeks (new unemployed) dropped by 341,000. However, the number of people who have been out of work for more than six months grew by 293,000. Helping these people find new jobs is critical.
“But I’m here today because our work is far from done. For even though we’ve reduced the deluge of job losses to a relative trickle, we are not yet creating jobs at a pace to help all those families who’ve been swept up in the flood. There are more than 7 million fewer Americans with jobs today than when this recession began. That’s a staggering figure, and one that reflects not only the depths of the hole from which we must ascend, but also a continuing human tragedy.”
Sort of puts the 1.6 million jobs created or saved into perspective.
“So today, I want to outline some of the broader steps that I believe should be at the heart of our effort to accelerate job growth — those areas that will generate the greatest number of jobs while generating the greatest value for our economy.
“First, we’re proposing a series of steps to help small businesses grow and hire new staff. Over the past 15 years, small businesses have created roughly 65 percent of all new jobs in America. These are companies formed around kitchen tables in family meetings, formed when an entrepreneur takes a chance on a dream, formed when a worker decides it’s time she became her own boss. These are also companies that drive innovation, producing 13 times more patents per employee than large companies. And it’s worth remembering, every once in a while a small business becomes a big business — and changes the world.
“That’s why it’s so important that we help small business struggling to stay open, or struggling to open in the first place, during these difficult times. Building on the tax cuts in the Recovery Act, we’re proposing a complete elimination of capital gains taxes on small business investment, along with an extension of write-offs to encourage small businesses to expand in the coming year. And I believe it’s worthwhile to create a tax incentive to encourage small businesses to add and keep employees, and I’m going to work with Congress to pass one.”
More details are needed here — most truly small businesses are not publicly traded, so we are talking about venture capital here that will mostly benefit from the elimination of the capital gains tax for small businesses.
“Now, these steps will help, but we also have to address the continuing struggle of small businesses to get loans that they need to start up and grow. To that end, we’re proposing to waive fees and increase the guarantees for SBA-backed loans. And I’m asking my Treasury Secretary to continue mobilizing the remaining TARP funds to facilitate lending to small businesses.”
A good and very useful idea since small businesses have been one of the most credit-constrained parts of the economy, and are traditionally the most important engine for new job creation.
“Second, we’re proposing a boost in investment in the nation’s infrastructure beyond what was included in the Recovery Act, to continue modernizing our transportation and communications networks. These are needed public works that engage private sector companies, spurring hiring all across the country.
“Already, more than 10,000 of these projects have been funded through the Recovery Act. And by design, Recovery Act work on roads, bridges, water systems, Superfund sites, broadband networks and clean energy projects will all be ramping up in the months ahead. It was planned this way for two reasons: so the impact would be felt over a two-year period; and, more importantly, because we wanted to do this right.
“The potential for abuse in a program of this magnitude, while operating at such a fast pace, was enormous. So I asked Vice President Biden and others to make sure to the extent humanly possible that the investments were sound, the projects worthy and the execution efficient. What this means is that we’re going to see even more work — and workers — on recovery projects in the next six months than we saw in the last six months.”
So far, so good on avoiding misuse of stimulus funds. This is a very big “dog that didn’t bark” story that has not gotten enough attention. Again the infrastructure projects are the last part to kick in, so it is possible that more problems will develop in the future. However, so far, the administration has proved itself to be extremely competent in the distribution of the funds.
“Even so, there are many more worthy projects than there were dollars to fund them. I recognize that by their nature these projects often take time, and will therefore create jobs over time. But the need for jobs will also last beyond next year, and the benefits of these investments will last years beyond that. So adding to this initiative to rebuild America’s infrastructure is the right thing to do.
“Third, I’m calling on Congress to consider a new program to provide incentives for consumers who retrofit their homes to become more energy-efficient, which we know creates jobs, saves money for families and reduces the pollution that threatens our environment. And I’m proposing that we expand select Recovery Act initiatives to promote energy efficiency and clean energy jobs which have been proven to be particularly popular and effective.
“It’s a positive sign that many of these programs drew so many applicants for funding that a lot of strong proposals — proposals that will leverage private capital and create jobs quickly — did not make the cut. With additional resources, in areas like advanced manufacturing of wind turbines and solar panels, for instance, we can help turn good ideas into good private sector jobs.”
There is a big “need for speed” here — otherwise those manufacturing jobs for solar panels and wind turbines could well end up in China, not the U.S.
“Finally, as we are moving forward in these areas, we should also extend the relief in the Recovery Act, including emergency assistance to seniors, unemployment insurance benefits, COBRA and relief to states and localities to prevent layoffs. This will help folks weathering these storms, while boosting consumer spending and promoting job growth.”
These might seem like band-aids, but when you are bleeding, band-aids help. I would question, “Why Seniors?” As a group, they are better off than are children. Oh that’s right — they vote and kids don’t.
“Of course, there’s only so much government can do. Job creation will ultimately depend on the real job creators: businesses across America. We were encouraged today to hear from the Business Roundtable that their survey showed greater confidence and greater potential investment coming out of the business community.
“Government can help lay the groundwork on which the private sector can better generate jobs, growth and innovation. After all, small-business tax relief is not a substitute for ingenuity and industriousness by our entrepreneurs — but it can help those with good ideas to grow and expand.
“Incentives to promote energy efficiency and clean energy manufacturing don’t automatically create jobs or lower carbon emissions — but these steps provide a framework in which companies can compete and innovate to create those jobs and reduce energy consumption. And while modernizing the physical and virtual networks that connect us will create private-sector jobs, they’ll do so while making it possible for companies to more easily and effectively move their products across this country and around the world, and that will create more jobs.”
True that over the long term what we want is more private sector jobs, and providing the right framework and incentives is probably more effective than a direct hiring spree by the government.
There was much more to the speech, but not many more specific details about the plan(s). In general, this is a continuation and expansion of the stimulus bill. The original one was too small, so we need a “Son of Stim” to finish the job.
All in all, I support the plan, but I would like to see a bit more flesh on the bones of the actual proposals. Yes they will add to the deficit, but if the economy remains in the tank, we will have big budget deficits in any case.
If the economy is weak, it does not generate tax revenues. If unemployment remains high, we have to continue spending money on band-aids like extended unemployment benefits. Better in the long run to spend a bit more now and get the economy rolling again than to face a weak economy and chronic deficits that stretch on forever.
It is those long-term deficits that are the real economic problem, not the deficit this year of in 2010. To tame those, we need to address entitlements and particularly health care spending, otherwise none of these things will make a real difference to the long-term budget picture.
The troop buildup in Afghanistan takes away resources that could be more usefully employed to create jobs and get the economy moving again. Winding down our presence in Iraq more quickly, if at all possible, would also help free up resources needed right now for the even more important war on unemployment.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.
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