Obama's Jobs Act Wouldn't Work. Here's What Would.

President Obama is doing his best to blame his bad economic record on his Republican opponents.  He has a proposed bill, the American Jobs Act, which would supposedly create jobs, so he bashes Republicans at every opportunity for not supporting it.  Meanwhile, his potential Republican opponents have some much better alternatives that would create huge numbers of jobs without costing the federal government a dime.

Obama's Jobs Act

Obama's largest proposed expenditure in this $447-billion bill is a temporary cut in the Social Security taxes paid by businesses and households.  But as Nobel Prize-winning economist Milton Friedman (the lead author's dissertation advisor) demonstrated, businesses and households base their decisions to invest and consume on permanent expected income.  Temporary tax cuts such as these purchase votes but do little to increase hiring or spending.

Another large expenditure would make grants to local governments to pay for 280,000 teachers, cops, and firefighters and to modernize "at least 35,000 public schools" -- a state and local government responsibility.  How would the Department of Education determine which states, school districts, and municipalities will receive the money?  Discretionary earmarks like these are an invitation to political chicanery.

Another expenditure would create a National Infrastructure Bank to finance modernizing roads and bridges, new and improved rail facilities, new airports, and waterways.  Yet another would finance the rehabilitation of "homes, business and communities" by "leveraging private capital and scaling land banks and other public-private collaborations."  At a time when bankrupt government-sponsored banks like Fannie Mae and Freddy Mac are bleeding hundreds of billions from the Treasury, expanding the government role in finance hardly sounds like good policy.

Another proposal promises the "most innovative reform to the unemployment insurance program in 40 years."  One of its provisions would "prohibit employers from discriminating against unemployed workers when hiring."  And the bill has teeth drawn from the Civil Rights Acts so that firms that discriminate against unemployed workers could be sued.  But if a firm hires a worker who is employed somewhere else, wouldn't that make a vacancy elsewhere?  Obama's new provision would discriminate against those workers who wish to better themselves by moving from one job to another.  The only new employment here would be given to trial lawyers, who would bleed businesses that were growing by hiring the best available employees.

So far, we have been talking about just the parts of Obama's bill that he claims would reduce unemployment.  The worst parts are the measures designed to raise the revenue to pay for all of this.  Jack Lew, the director of the White House Office of Management and Budget, said the bulk of the plan -- $400 billion over 10 years -- would be raised by limiting the itemized deductions, such as those for charitable contributions and other expenditures, that may be taken by individuals making more than $200,000 a year and families making over $250,000 a year.  There goes much of the funding for charities!

The rest would come from provisions affecting oil and gas companies, hedge funds, and the owners of corporate jets.  Eliminating the oil and gas industry's depletion allowances could discourage them from drilling for new gas and oil within the United States, but would not discourage drilling abroad where they are not subject to the excessively high U.S. corporate income tax, so long as they reinvest their profits abroad.

The Domestic Energy Alternative

Nearly all of the Republican candidates are advocating that President Obama take away his many roadblocks to drilling for oil and natural gas and to mining for and burning coal.  Indeed, the traditional energy sector has the potential for creating new jobs rapidly.

Thanks to the discoveries of gas in shale and new drilling technologies, this sector is already creating tens of thousands of jobs in North Dakota (an unemployment rate of 3 percent!), Pennsylvania, West Virginia, Texas, et al. and is capable of making us a leading producer and exporter.

Compressed natural gas costs about 3/5 the price of gasoline.  As fleet owners convert to compressed natural gas (CNG) as a fuel, the few filling stations that have already been built will soon be augmented by thousands along the interstates and in our cities, making it possible for households and small businesses to switch to CNG-powered vehicles.  This switchover has the potential to revolutionize motor transportation, create a real boom, and eliminate U.S. dependence upon imported oil.  All the federal government has to do is get out of the way!

Obama's proposed new tax on the oil and gas companies is just his latest attempt to discourage fossil fuel use and production in the United States in order to make the much more expensive green energy seem more attractive.  But when Obama negotiated the Copenhagen Accord with leaders of India, Brazil, South Africa, and China following the failure of the U.N. Climate Control Conference in Copenhagen in December 2009, he exempted China from any transparency and international verification requirements that would arise from a climate treaty.  As a result, when he makes energy more expensive in the United States, he simply sends U.S. industry to China.

The Balanced Trade Alternative

Another solution would be to balance trade.  The U.S. trade position has been deteriorating steadily under Obama's watch.  Net exports (exports minus imports) in goods and services fell to negative $538 billion in the 12 months ending in July, the nineteenth consecutive month when our monthly trade deficit was worse than it had been the same month one year earlier.  Each of these $538 billions of dollars subtracts from American income, subtracts from demand for American products, and puts Americans into greater debt to foreigners.

President Obama freely lets our trading partners violate one of the chief rules of trade.  Article IV of the International Monetary Fund Articles of Agreement requires that countries "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."

The worst offender has been China.  According to statistics reported by the Asian Development Bank, in 2009 the Chinese government increased its currency reserves by $453 billion as one of the byproducts of its currency manipulations.  During 2010 it accumulated an additional $256 billion.  About 2/3 of these currency reserves are dollars, though nobody outside China knows for sure, since the People's Bank of China won't disclose the currency composition of its foreign exchange reserves to international organizations.

As a result of China's dollar purchases, U.S. net exports in goods to China (exports minus imports) hit a new 12-month low in July, falling to a negative $288 billion over the most recent 12 months, as shown in the graph below:

Some of the Republican presidential candidates have taken strong positions on trade with China.  On August 16, Congressman Thaddeus McCotter, then one of the little-known candidates for the Republican presidential nomination, called for Washington to stop permitting Communist China's "predatory, mercantilist trade practices."  On September 6, Governor Romney revealed a jobs plan which condemned China for stealing proprietary technology from American companies producing there, called for the possible use of targeted tariffs or multilateral sanctions, and demanded Chinese reciprocity with regard to government procurement decisions.

But why limit our trade demands to China?  Many of our other trading partners are copying China's technique of manipulating exchange rates in order to run trade surpluses with the United States -- even Mexico, with whom we have a long-standing free-trade agreement and South Korea with whom we are about to sign a free-trade agreement.

On May 31, Governor Palin called for balanced trade arrangements with our trading partners but didn't specify how she would achieve them.  Under WTO rules, the United States could impose a scaled tariff on each of the countries with whom we have trade deficits.  Such a tariff would gradually balance trade, which would bring in about $540 billion of new American income -- about 5.4 million new jobs, each producing about $100,000 of product.  These productive workers would, in turn, employ other Americans to provide them with services.  The United States economy would boom.

Disclosure: The authors get royalties from gas wells or own stock in companies that are involved with oil and natural gas production.  They maintain a blog at www.idealtaxes.com, and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.

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