Washington Insider - Solving the Jobs Puzzle

Washington shifts the debate from debt to jobs, presenting an opportunity for strategic maritime infrastructure investments.

Faced with the imminent prospect of default, in late July President Obama, Democratic Senate Majority Leader Harry Reid and Republican Speaker of the House John Boehner reached a modest accord to trim the nation’s long-term debt and raise the debt ceiling through the 2012 election. But as feared, the path to agreement proved tortuous. Congress took such a beating in the polls for its part in the embarrassing debacle that its disapproval rating soared above 80 percent, an all-time high. Likewise, President Obama’s approval rating sank to its lowest level yet. Yet the prospect of strategic infrastructure investments, including badly needed maritime improvements, signals a pragmatic way to restore both jobs and the reputations of the two political parties.

A Bad Precedent
Although the leaders of both parties disclaimed any likelihood of default, the House Republican Tea Party caucus precipitated the crisis by steadfastly rebuffing more balanced compromises proposed by their own Speaker and the President. On the brink of default, the President relented to terms lacking the balance he repeatedly asserted was necessary.

Critics from his own party complained the compromise manifested neither hope nor change, but weakness. While prominent political pundits chalked up a victory for the Tea Party caucus and a loss for the President, the real loser in this entirely needless political crisis was the U.S., which sustained a wholly self-inflicted wound to its creditworthiness. Although severely criticized as unwarranted, the decision by Standard & Poors to downgrade the country’s creditworthiness serves as a stark reminder of the real consequences of playing politics with the nation’s credit. From now on, each time the debt ceiling must be raised, unabashed calls for default will be fair game for whichever side sees political advantage. This is a bad precedent for America.

An Election Campaign About Jobs
The debt-ceiling agreement temporarily settled the issue and freed President Obama to shift the political debate to jobs. In early September he announced the American Jobs Act, designed to create approximately two million new jobs and reduce the nation’s unemployment rate from its stubbornly high 9.1 percent.

Republican Senate Leader Mitch McConnell decried the proposal as merely a “reelection plan.” Tea Party Republican congressmen disparaged it as “a mini-me stimulus” and the “same ole stuff.” But remarkably, the House Republican leadership signaled a willingness to work with the President. This change in tone flowed from Congress’ historically high disapproval rating and the calculation that the President’s proposal provides House Republicans the opportunity to reform their public image into one of reasonable legislators solving the country’s problems.

The House Republican leadership will likely accept the President’s proposals for tax cuts and reshape them to better suit its constituencies. This should present congressional Democrats and the President with a proposal accentuating broad-based corporate tax cuts, tax-free repatriation of offshore corporate profits, and sweeping deregulation.

While Senator McConnell’s critique of the President’s jobs plan as a “reelection plan” has merit, his critique applies with equal force to the Republican response and their proposals.  As the frequent Republican presidential debates illustrate, we are in the midst of a full-fledged election campaign over the next 13 months, and neither party plausibly asserts that it is not engaged in a “reelection plan.”

Underlying Divisions Persist
Notwithstanding the President’s effort to reset the debate and the newfound image of reasonableness projected by the House Republican leadership, the fundamental differences separating the two political parties remain unresolved. The President’s proposal is largely a reprise of his original stimulus program and subsequent measures adopted in December 2010 to stimulate demand and employment. Although his programs have consistently featured extended unemployment benefits and tax cuts, the cuts have been targeted to lower wage earners and small businesses, renewable energy and conservation, and businesses investing and hiring new employees. By contrast, congressional Republicans favor repeal of Obama’s health care reform legislation, reductions in corporate income tax rates, including tax-free repatriation of offshore corporate profits, and sweeping deregulation.

Obama’s proposal to pay for the American Jobs Act with tax increases on Americans earning more than $200,000, oil companies, and corporate jet owners sharply accentuates the enduring policy divide. The debate about how to pay for a jobs bill returns the two parties to the issues separating them during the debt-ceiling negotiations. The President seeks tax increases to pay for his jobs proposal while congressional Republicans oppose them as “job killers.” Instead, they argue that savings should be achieved through budget cuts to signature Democratic Party programs, e.g., health care reform, Medicaid and Medicare. 

If past is prologue, major concessions appear doubtful. Consequently, the American Jobs Act will likely not be enacted into law or paid for as proposed by the President. A more modest agreement may be reached, but if the concessions demanded by congressional Republicans prove too much, then the President will likely blame them for inaction. Former Obama advisor David Axelrod hearkened back to President Harry Truman’s axiom that if you can’t make your political opponents see the light, then make them feel the heat. Such language aims to reenergize Obama’s political base and confirms the proposal is as much about defining differences as creating jobs.

Infrastructure Spending and More Stimulus
Amidst this polarized political atmosphere, Obama’s $447 billion jobs proposal includes $50 billion in surface transportation infrastructure spending, including “intermodal transportation.” It would accelerate highway and rail projects but also provides an opportunity for sponsors of deserving maritime projects which have remained unfunded. Business and labor leaders agree that infrastructure investments will cut unemployment and improve America’s exports. By contrast, House Tea Party Republicans oppose infrastructure spending unless paid for by cuts to federal programs they oppose.

The case for stimulus spending also enjoys support from Federal Reserve Chairman Ben Bernanke, who was first appointed by Republican President George W. Bush. Chairman Bernanke, a distinguished scholar of the Great Depression, has consistently warned against withdrawing fiscal stimulus from the economy. As he explained, “Substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring.” And, indeed, the House version of the annual highway appropriation for 2012 threatens to cut highway spending dramatically because of reduced receipts in the Highway Trust Fund.

Withdrawal of fiscal stimulus repeats the mistake President Franklin Roosevelt and the Federal Reserve made that caused the economic recession of 1937 – 1938. Economic historians agree that the Roosevelt Administration was insufficiently committed to spend the funds necessary to solve the Great Depression, and the Federal Reserve’s tight monetary policy was counterproductive. Ultimately, only World War II provided the political justification for relaxed monetary policy and deficit spending of sufficient magnitude to pull the nation from the depths of the Great Depression. 

Similarly, today the nation struggles to overcome the folk wisdom that it should pursue a policy of fiscal restraint amidst recession. Appealing to their most ardent conservative activists, Republican presidential candidates have roundly pilloried Chairman Bernanke and Keynesian economics as the cause of the nation’s economic malaise. Nothing could be further from the truth. Chairman Bernanke’s actions to save the financial system from collapse and the much-criticized stimulus program of President Obama averted a much deeper recession. That these initiatives did not work faster and better to reduce the nation’s unemployment rate principally results from their modesty in the face of a much greater challenge than policy makers understood at the time.

While federal stimulus spending increased, state and local government spending contracted a like amount. The enduring consequences of the financial bubble’s bursting cast a shadow over the nation’s housing industry that requires more time to write-off massive debts. In this problematic area, modest government programs have proved too timid, and the private sector’s own solutions have been stymied by a reluctance to write down debt. Likewise, corporate America remains reluctant to tap its more than one trillion dollars in cash and cash equivalents to hire employees because of a lack of demand for its products and services. In these circumstances, federal infrastructure spending will stimulate employment and demand through strategic investments.

Potential Maritime Investments
While the President’s spending proposal did not mention maritime infrastructure, these strategic investments warrant inclusion. The nation’s maritime transportation system features an enormous backlog of critically important projects. The crumbling state of our inland waterways is well documented. Yet Congress has hoarded millions of dollars in reserve in the Inland Waterways Trust Fund (IWTF) to reduce the deficit. Likewise, billions of dollars held in reserve in the Harbor Maintenance Trust Fund (HMTF) have gone unspent as part of a budgetary shell game. Meanwhile, the nation’s locks, dams and navigational channels deteriorate.

Just spending the funds already available in these trust funds could stimulate the economy, create jobs, and provide valuable long-term investments in America’s future. For example, the HMTF currently has $6.1 billion available for spending, but the current appropriations bills in Congress won’t spend half of it. Likewise, current spending bills will use less than half of the almost $400 million balance of the IWTF. Rather than withholding these funds to reduce the budget deficit, policy makers should use them now on badly needed maritime infrastructure projects.

Likewise, major shipbuilding projects already approved and underway in the nation’s shipyards could be accelerated, thereby creating jobs now. But the recent decision of the House of Representatives to cut $350 million from the Coast Guard’s shipbuilding budget for fast response and national security cutters moves in the wrong direction and defies comprehension, especially when the Coast Guard’s aging fleet desperately requires modernization. Why defer this spending for “budgetary” reasons when jobs can be created now? Investments in port and waterway infrastructure and shipyard programs should be accelerated, not delayed. Deserving projects vetted last year await only funding to spark job creation.

End Game
With Washington’s legislative agenda refocused on jobs, both political parties can gain by enacting programs to spur job creation. And strategic maritime infrastructure investments should be included. The critical question remains: Will the political parties find a way to compromise their divergent positions about how to pay for these investments? – MarEx