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I heart you: recovery (86) … 100911

September 9, 2011

Many economists say Obama jobs plan will help
By Paul Wiseman, Associated Press
Updated 12h 29m ago

That was the assessment Thursday night from economists, who offered mainly positive reviews of President Barack Obama’s $447 billion plan to stimulate job creation.

Some predicted it would put hundreds of thousands of people back to work next year, mainly because a Social Security tax cut for workers would be deepened and extended to small businesses.

“Payroll tax cuts are very powerful,” said Allen Sinai, chief economist of Decision Economics. “They provide a boost to direct income and, in turn, spending, which is important to growth.”

Mark Zandi, chief economist at Moody’s Analytics, estimated that the president’s plan would boost economic growth by 2 percentage points, add 2 million jobs and reduce unemployment by a full percentage point next year compared with existing law.

The heart of Obama’s plan is an expansion of the Social Security tax cut, which took effect this year and is scheduled to expire by year’s end. The tax cut now applies only to workers; it reduces their Social Security tax from 6.2% to 4.2%. Employers still pay the 6.2% rate.

Obama would renew the tax cut for a year and deepen it: He would drop workers’ Social Security tax to 3.1%.

Under his bigger tax cut, an extra $1,550 would go to taxpayers earning $50,000 a year. The Social Security tax is imposed on the first $106,800 of taxable income. That means the maximum savings would be about $3,300 for an individual and $6,600 for a couple.

Obama would also cut in half Social Security taxes for businesses whose payrolls are $5 million or less. The White House says that would include 98% of U.S. businesses.

Zandi calls this a “creative” way to help small companies, which have struggled more than larger ones to recover from the Great Recession of 2007-2009. During recoveries, small businesses normally drive job creation.

“Something like this is much needed” for an economy grappling with 9.1% unemployment, Zandi said. “The economy is on the edge of recession.”

Susan Wachter, a finance professor at the University of Pennsylvania’s Wharton School, figures the Social Security tax cuts alone would add 1 percentage point to economic growth and create 1 million jobs next year.

The president’s plan also takes a shot at long-term unemployment: Companies would get a $4,000 tax break for hiring people who have been unemployed more than six months. As of August, the government says, 43% of unemployed Americans have been out of work six months or more.

The plan would also extend emergency unemployment benefits; ramp up spending on public works projects; and provide aid to keep state and local governments from laying off teachers. Obama would pay for his program with future budget cuts.

Some economists cautioned that some factors might blunt the impact of Obama’s enlarged Social Security tax cut. For one thing, the tax cut would deliver only a temporary boost. It would expire at the end of 2012. Most economists foresee unemployment remaining high well after next year.

And Michael Mandel, chief economic strategist for the Progressive Policy Institute, suggested that the link between consumer spending and job creation is weaker in an economy like America’s that’s highly open to foreign goods.

Consumer spending accounts for about 70% of the economy.

“If the payroll tax cut encourages consumers to buy more (imported) clothing, that’s likely to create more jobs overseas than in the U.S.,” Mandel said.

In addition, Paul Ashworth, chief U.S. economist at Capital Economics, said many taxpayers might save the extra money from the tax cut rather than spend it.

“In an environment where economic confidence has been almost completely destroyed, there is a risk that both households and small businesses will save a greater proportion of any windfall, particularly if they know the reduction is only temporary,” Ashworth said.

The White House plan would also extend emergency unemployment benefits for another year. Economists note that unemployment checks put money in the hands of people who are most likely to spend it immediately.

That spending tends to boost demand for goods and services and give companies more reason to hire. The forecasting firm Macroeconomic Advisers has estimated that an additional year of emergency unemployment benefits would support 200,000 jobs in 2012.

Obama also wants $30 billion to modernize schools, $50 billion for road and bridge projects and a bank that would finance more public works projects.

The president’s plan will likely face resistance in Congress. Republicans have opposed further spending and have pushed to reduce the budget and shrink the government.

Still, the Wharton School’s Wachter called Obama’s plan a serious proposal that should be politically acceptable “across the board.”

Menzie Chinn, an economist at the University of Wisconsin, would favor an even bigger jobs package for an economy that grew at an annual rate of just 0.7% the first six months of the year and created zero net jobs in August.

He said he fears Obama’s plan merely makes up for the expiration of the president’s earlier $862 billion economic stimulus plan.

Even so, Chinn said, the measures Obama proposed Thursday night “might prevent the economy from dropping below stall speed” — at which point it would be vulnerable to another recession.
More Volatility as Stocks Drop Sharply

By CHRISTINE HAUSER
Published: September 9, 2011

At 4 p.m., the VIX volatility index was 40.11, the highest level since Aug. 22, when it was 42.44.

Stocks in the United States followed Europe, where the European Central Bank said Jürgen Stark, a German who sits on the executive board of the E.C.B. and is known as an opponent of the bank’s bond-buying program, would resign his post.

The DAX in Germany fell 4 percent. The FTSE 100 in Britain closed down 2.4 percent, and the CAC 40 index in France was down 3.6 percent.

Analysts attributed the sharp declines to a variety of reasons, including developments in the euro zone. . A speech by President Obama on jobs did little to lift the malaise because of uncertainty over whether the program would pass and help the recovery, analysts said.

Paul Ballew, a former Federal Reserve economist and now chief economist at Nationwide, said short-term interest rates in Greece were reflecting increased uncertainty in Europe as well as speculation over whether there would be adequate restructuring in that nation’s economy to address its problems.

There was also evidence of a flight to safety among investors, in which they shed stocks for bonds. Yields on Germany’s 10-year bonds declined, and the United States Treasury’s 10-year note yield fell to 1.92 percent, from 1.98 percent late Thursday, after touching a low of 1.89 percent during the day.

“Issue number two is the continued anxiety in the United States that the recovery continues to stall, and that we will not be getting growth as strong as we would need in terms of corporate profits,” said Mr. Ballew.

“Even yesterday’s speech raises questions of whether there will be support for fiscal policy,” he said about the president’s jobs address.

Mr. Obama’s plan focused on generating jobs and included a number of tax cuts and spending proposals, like an extension and expansion of the cut in payroll taxes and a tax holiday for small businesses for hiring new employees. The president was to send a detailed proposal to Congress in a week.

Mr. Ballew said that questions persisted about how much of the proposal would pass.

In addition, investors were considering whether fiscal or monetary policy could come to the rescue of the economy as they await the Federal Reserve policy meeting later this month. Stocks were sharply lower on Thursday after the chairman of the Federal Reserve, Ben S. Bernanke, gave no new signs that there would be fresh stimulus measures.

“If you are in the market right now, you’ve got uncertainty on top of uncertainty on top of uncertainty,” Mr. Ballew said. “You have got a pretty toxic mix.”

Dan Greenhaus, the chief global strategist at BTIG, said news of the resignation of Mr. Stark “exacerbated” concerns about the euro currency zone. In addition, a Bloomberg News report, citing three officials, said Germany was preparing banks in the event that Greece fails to meet the terms of its aid package and defaults.

“These are particularly negative headlines and the market took them as such,” Mr. Greenhaus said. “Market participants are increasingly nervous about a Greek default and its effect on the already weak European bank sector.”

Greece’s finance minister, Evangelos Venizelos, dismissed the rumors of a default and said it was committed to fully implementing the terms of the aid package, Bloomberg News also reported. Friday’s stock declines set the markets on track to extend their year- and month-to-date declines. And Clark Yingst, the chief market analyst at Joseph Gunnar, said that the fall of the euro against the dollar on Friday, resulting in a six-month low, suggested that the broader market as measured by the S.&P. 500 had not yet completed its recent correction.

He said a rally earlier in the week in stocks was partially in anticipation of Mr. Bernanke’s and Mr. Obama’s speeches, and their possible policy tools that could be in the making.

“The market just doesn’t believe that it is going to be passed by that Republican house,” Mr. Yingst said of Mr. Obama’s speech.

He noted that the United States bond’s 10-year price recently touched record highs, with the yield lower than where it was in the midst of the global financial meltdown, 2.055 percent in December 2008.

“It is an indication that bond investors clearly see a significant slowdown in the U.S. economy,” he said, “and bond investors think it is going to remain very slow, very sluggish.”

Jack Ewing and Nicholas Kulish contributed reporting from Frankfurt.

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