When Senator Kerry last week unveiled his plan to create ten million new jobs during his first term as President, the first reactions came from political commentators who agree that he scored with it. The only really negative comment that I saw from a Republican economist was Glenn Hubbard’s comment in the Wall Street Journal news account that it was “nuts.” The White House seemed oddly silent, perhaps not wanting to seem too hasty in making fun of the very first specific proposal by the man who appears to be running neck-and-neck with President Bush in the early presidential polls. Besides, the plan to rearrange the tax code to reward companies that create jobs here by penalizing companies that send jobs overseas was said to have the imprimatur of Bob Rubin. Enthusiasts still are describing President Clinton’s Treasury Secretary – in between Lloyd Bentsen and Larry Summers – as “the greatest Treasury Secretary since Alexander Hamilton,” with even talk that Kerry should pick him as his running mate! Rubin, who scarcely knew what he was doing at Treasury, would be well advised to keep silent at his new megabuck job at Citigroup, as any serious advice he publicly offers is bound to tarnish his reputation if anyone takes it.
The problem remaining for Democrats is that as long as they continue to insist that Ronald Reagan’s supply-side economic policies were a failure, the professional economists who are inside the Democratic tent are obliged to follow that line or be excommunicated. Howard Dean had the nomination in his hand, but was crippled by the Kerry TV spots that informed the voters of Iowa about Dean’s total rollback of the Bush tax cuts. Kerry, now being weakened by Bush TV spots inferring that he too wants to undo the Bush tax cuts, came up with his jobs plan by asking four ex-Clinton “economists” to come up with something to address the public’s concern with “outsourcing” and the “jobless recovery.” Three of the four turn out to be non-economists. Roger Altman was Bentsen’s deputy in the first two years of the Clinton administration and was hapless even then. When Rubin moved from the National Economic Council in the West Wing to Treasury in January 1995 after the Clinton tax hikes backed by Altman caused the Democratic loss of Congress, he was replaced by Gene Sperling. Altman has as little technical experience as I have, but also has a fascination with “Krugmanomics” at the macro-level, which of course I do not share. The other two key people behind the “plan” were policy director Sarah Bianchi and the one true economist, Jason Furman, who did the technical vetting for the plan.
The best round-up that I have seen in the press so far is by Bloomberg’s Caroline Baum, who Tuesday wrote “Kerry’s Plan Creates Incentives for Accountants." She broke the responses that she got from admittedly conservative economists into a “spaghetti western” metaphor of “the good, the bad and the ugly.” There is agreement the 5% cut in the corporate tax rate to 32.5% from 35% is “good.” The “bad” is the tax increase to pay for the 5% cut by removing the loophole that permits U.S. multinationals to keep profits abroad after paying taxes on them abroad, deferring their obligation to pay U.S. corporate taxes. There now is something like $770 billion in such deferred taxes abroad, which Kerry’s plan would allow to come home and face a 10% tax rate instead of the 25%. This keeps him almost as generous as the GOP tax holiday now stuck in Congress, which would permit a 5.25% tax in its “tax holiday.” The “ugly” part, says Bloomberg’s Baum, is the reckoning that the package will produce ten million jobs. She does not say why, but surmises that the plan in the end may even lose jobs.
This is exactly the position of Gary Robbins of Fiscal Associates, who is the best supply-side tax technician in the world. Robbins, whom I quoted in my recent essay on “Globalization’s Newest Paradigm,” says the end of the deferral provision would simply force companies to do things differently. Where they now have their foreign affiliates producing goods and services because they are so much cheaper in India, say, or China, they would then contract with an Indian or Chinese company that would do the same work and be able to avoid the double-taxing issue. Nothing would change in terms of the jobs here or abroad, except U.S. consumers would pay slightly higher prices because of the costs associated with moving around the furniture.
Working on the back of an envelope, Robbins told me that the 5% corporate tax cut would add no more than 250,000 jobs during the next four years, and that the young economist who reckons ten million new jobs for the whole package never seemed to take into account the price elasticity of labor. With the unemployment rate now at 5.6% and 133 million people working, he figures that the U.S. wage rate would have to climb by 25% using the most conservative assumptions on what it will take to get people interested in presenting themselves for work. The only way wage rates can climb by that amount would be a dramatic increase in productivity during the four-year period. However, Senator Kerry is going in the opposite direction by proposing higher tax rates on capital formation, as Roger Altman says this would be a high priority of the Kerry administration – rolling back the cuts in capital gains and dividend taxes.
Then again, in a nasty way this might solve the elasticity problem that Gary Robbins brings up. If you drive productivity low enough by forcing labor to work without capital, you take the stock market into the sub-basement. Another 20 million Americans now retired would be forced to present themselves in the labor market to work for peanuts. The bad news is that ten million more might be employed, but another ten million would be on the unemployment lines, and on the dole to boot.
In the period since Kerry presented his plan, he has found himself losing the slight lead he had in match-up polls with Mr. Bush. This almost certainly is the result of the Bush team’s campaign spotlighting Kerry’s Senate voting record on taxes, with Vice President Cheney citing “350” instances where the Massachusetts liberal voted to raise taxes. The Kerry team seemed to think that his jobs plan would get him out of that spotlight by showing a willingness to cut corporate tax rates and by dealing with the “outsourcing” issue in a way that the administration has not. But being poorly designed, it is now being shredded by anyone who takes a serious look at it. Roger Altman appeared on CNBC’s “Squawk Box” this morning to defend his creation, but by the end of the segment the anchormen and reporters were openly chuckling at his total failure to make any sense in answering their tough questions. The Senator needs help that he will not get from this crew.
For his part, President Bush may be back in the lead on the match-ups, but he continues to decline in his job performance ratings with the public, now down to 46% in the latest Zogby Poll – the result of his problems with 9-11 and Iraq revelations. So we may have a presidential horserace that is neck-and-neck, but at the moment both Kerry and Bush are running backwards.
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