The Devil in the Job Act Details

There’s a few more details–and as you know the devil is always in those–coming out about the president’s proposed American Jobs Act.  The first hurdle will be the Republican Congress who will most likely rip out anything that hasn’t got anything to do with subsidizing rich people and corporations through worthless tax cuts. But, there are some other issues likely to come up also.  I’ve found a few to share.  Bear with me, this is long and wonkish in places.

This first one deals with one part of the Act that may not exactly deal with jobs but could help people stay in their homes and stabilize the housing industry. The President inkled it in one line.  The President’s original plan–called HARP–has not really lived up to its promise of large scale help for struggling home owners. Many of the folks that may have qualified for the program have not been able to get help and those upside down on mortgages have had real issues. This ProPublica article explains why this program failed and the new program–if passed– may have it’s own issues.  One of the biggest problems is coming and will come from the Federal Home Financing Authority (FHFA), the regulator and conservator of Fannie and Freddie.

Some of the reasons the old program has fallen short are complicated and aren’t likely to be easily fixed. Loans with mortgage insurance, for instance, are often denied because the insurer must agree to transfer the policy to the new loan. Loans with a second mortgage present their own difficulties.

But there have also been two key players who are obstacles to the program’s success — the banks and, perhaps surprisingly, the federal regulator overseeing Fannie Mae and Freddie Mac. Both seem likely to continue their skeptical stance, because both view helping underwater homeowners as risky.

The banks have been widely reported to be wary of offering new mortgages to borrowers who owe more on their house than its worth. Although the loans are backed by Fannie or Freddie, the bank could still be on the hook if the homeowner defaults and Fannie or Freddie finds that the bank didn’t properly underwrite the new loan. The bank could be forced to buy the loan back. Because underwater homeowners are seen as being at a greater risk of defaulting, they’ve been wary of taking those on. (You might have noticed that since the housing bubble burst, banks have become much more cautious.)

Fannie and Freddie’s federal regulator, the Federal Housing Finance Agency (FHFA), could choose to remove that risk for banks. Doing so, however, would shift that risk from the banks to Fannie and Freddie, and that’s something FHFA hasn’t been eager to do. As a former White House aide put it to The Wall Street Journal, FHFA head Edward DeMarco’s “first instinct is to say no.”

FHFA is an independent federal agency, so even though taxpayers have kept the two companies afloat, they are not under the administration’s direct control.

FHFA’s independence has lately been a big obstacle for the White House. We reported in December of last year on FHFA’s opposition to cutting mortgages for underwater homeowners facing foreclosure. Reducing the principal amount would make homeowners much less likely to re-default, but would lead to short-term losses for Fannie and Freddie. A public White House push on the idea has so far gotten nowhere.

Any more fixes to the old program or additions to the new program will need FHFA approval and that seems in doubt.  If you’re interested in this detail, go read the article.

Okay, let’s look at the major problem.  That’s getting the plan past the likes of Eric Cantor who looked positively sullen while taking notes at the   presidential speech last night.  Actually, he had a rather strange bespeckled pallor in his face and put me in mind of Uriah Heep or the onset of melanoma.

“This is my objection to the message that was delivered tonight,” House Majority Leader Eric Cantor (R-Va.) told reporters in the Capitol after the speech. “The message was: either accept my package as it is, or I will take it to the American people. I would say that that’s the wrong approach. What we’re here to do is try to transcend differences, not let them get in the way in the areas we can make progress on.”

Cantor added that “as majority leader, I certainly would like to see us be able to peel off some of these ideas, put them on the floor, vote them across the floor and get the senate to join with us so we can actually get something to the president and make some progress as quickly as possible.”

The quick reaction from a top congressional Republican suggests the GOP is not outright dismissing all of Obama’s ideas, but certainly is not going to pass the entire $450 billion package in one fell swoop.

Cantor has already pooh poohed the idea of an infrastructure bank which is actually one of the more meaningful aspects of the proposed act.

“I’m wary of the suggestion of an infrastructure bank,” House Majority Leader Eric Cantor (R-VA) told reporters at a roundtable lunch hosted by the Christian Science Monitor. “I am one who agrees with the notion that an infrastructure bank is almost like creating a Fanny and Freddie for roads and bridges.”

That’s President Obama’s favored infrastructure spending idea — to loan both private and public dollars to states and municipalities to speed up new and existing building projects, and to lure private investment with the promise of returns from tolls and other fees. Cantor’s counter offer is to nix the requirement that states “set aside 10 percent of federal surface transportation funds for transportation museums, education, and preservation would allow states to devote these monies to high-priority infrastructure projects, without adding to the deficit.”

These are pretty different ideas, though they could meet similar ends in some circumstances. The infrastructure bank wouldn’t require canceling some projects (mainly for bikers and pedestrians) to fund different ones, and would fund projects that meet high bang-for-the-buck, and environmental standards.

Jared Bernstein — an economist at the Center on Budget and Policy Priorities and Vice President Joe Biden’s former top economic adviser — told TPM, “the [infrastructure] bank has real advantages in terms of rigorous cost benefit analysis in choosing projects that this idea doesn’t sound like it would…. but 10 percent isn’t a lot and this kind of flexibility can be a useful thing I would just want to know what kind of criteria the project choice involves. Because the last thing we want to do is waste these scarce resources.”

Additionally, I firmly believe that Republican Governors are committed to killing Teacher’s Unions and don’t seriously want any incentives to keep teachers on the payroll.  Here’s a good example of how much they hate these organizations from NJ Fat Cat Governor Chris Christie.  Teacher’s Unions are seriously important to local Democratic Candidates.  They work and they donate funds.  You can see their importance in the Wisconsin Cheddar Revolution.  Restructuring the New Orleans school District down here to accommodate charter schools has really only been successful at one thing:  replacing teacher contracts negotiated by unions with non union lower paying, less job security contracts.  I’m sure the Republicans won’t want any money funneled to states aimed at keeping union worker’s in place.

“There’s nobody in this room who runs a successful business who says, tells an employee after three years and a day — I’m sure this doesn’t happen at Koch Industries — where they call ‘em in after three years and a day and say, ‘Hey, you have been great for three years and a day, and guess what? You have a job here at Koch Industries for the rest of your life. Congratulations!’ Christie said.

“But this is the way we’re running our schools. We need to get rid of tenure… It’s just not right. And so we need to do these things and that’s where we head next. We’ve taken care of the first two big of the big things, at least for the moment, and now the third big thing is we need to take on the teachers’ union once and for all and we need to decide, who is determining our children’s future? Who is running this place? Them or us? I say it’s us, and we’ve got to go fight to do it now.”

Here’s Paul Krugman explaining a portion of the President’s Plan. He has one similar question that I voiced most of yesterday.  The original stimulus didn’t really stimulate as much as it stopped the freefall of the economy.  That’s an okay thing, but as you can see, it really has left the plan open to a lot of criticism because it didn’t really go far enough.  This plan has the same issue.  If many measures currently in place are allowed to expire, things will get worse.  However, stopping things from getting worse still doesn’t move things forward.

O.K., about the Obama plan: It calls for about $200 billion in new spending — much of it on things we need in any case, like school repair, transportation networks, and avoiding teacher layoffs — and $240 billion in tax cuts. That may sound like a lot, but it actually isn’t. The lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the U.S. economy, and this plan — which wouldn’t deliver all its benefits in the first year — would fill only part of that hole. And it’s unclear, in particular, how effective the tax cuts would be at boosting spending.

The other thing that I really still don’t understand–accept in pure political terms–is the fascination with decreasing spending to balance the budget while making the budget deficit worse by providing less productive tax cuts.  It is still your basic Voodoo Economics.  Yes, tax cuts can do some things, but the multipliers on tax cuts pale in comparison to direct government spending.  I’ve mentioned this before, but putting money back to consumers and businesses via tax cuts means that a portion of that drains to unproductive things. That’s okay policy for a small recession, but it’s not good for what’s happened to us since 2007. Redirecting money from good spending to iffy tax cuts doesn’t make a lot of sense to me.

Moody’s must have a much more powerful computer program than I have intuition and understanding of macroeconomic theory.  Direct government spending on infrastructure goes out full force and then starts multiplying by going additional rounds to businesses and consumers.  The first dose is full force and the draining doesn’t occur until the second round.  I really don’t think the lawyers in the White House get the idea of economic multipliers at all, but then, maybe it is just because of the politics.  Republicans could care less about the health of the general economy and working population as long as they retain power, feed their ideological base, and prop up corporations.  I wouldn’t put numbers out at all–like Moody’s–until I see the recessionary impact of the offsets.

So, here’s Ezra Klein–Baghdad Bob of the DC villagers–with a good laundry list of details.  See which ones you think the Republicans will pick off.  I’m more interested in that last statement because, again, you can’t really judge how much it can’t do without looking at the offsets.  It could wind up a wash or worse.

– It cuts the payroll tax for workers in half, which amounts to a $175 billion tax break, and cuts it in half for businesses until they reach the $5 million mark on their payrolls, at a cost of $65 billion. The idea there is to target the tax cut to struggling small businesses, rather than the cash-rich large businesses. It also extends the credit allowing businesses to expense 100 percent of their investments through 2012, which the White House predicts will cost $5 billion.

– It offers $35 billion in aid to states and cities to prevent teacher layoffs, and earmarks $25 billion for investments in school infrastructure.

– It sets aside $50 billion for investments in transportation infrastructure, $15 billion for investments in vacant or foreclosed properties, and $10 billion for an infrastructure bank. It also makes mention of a program to “deploy high-speed wireless services to at least 98 percent of Americans,” but it doesn’t offer many details on that program.

– It provides $49 billion to extend expanded unemployment insurance benefits. $8 billion for a new tax credit to encourage businesses to hire the long-term unemployed, and $5 billion for a new program aimed at supporting part-time and summer jobs for youth and job training for the unemployed.

– It also encourages the Federal Housing Finance Authority to make it easier for underwater homeowners to refinance their mortgages.

If all of that could be spent out in 2012 — a big if, but given the reliance on tax cuts and state and local aid, much of it could certainly hit before the year’s end — it would be bigger, in annual terms, than the Recovery Act. The White House also promises the entire proposal will be paid for, and the specific offsets will be released next week.

My other concern comes at the end of this analysis by Macroadvisers.  It looks good if it goes as proposed by the President and if there were no offsets but the entire thing is quite temporary.  All of these are HUGE ifs.  The analysis is sound under the ifs, however.

Because these initiatives are planned to expire by the end of 2012 — except for the infrastructure spending, which has a longer tail — the GDP and employment effects are expected to be temporary.

• That is, these proposals will pull forward increases in GDP and employment, not permanently raise their level.
• Nevertheless, there may be good reasons to want to implement such programs today, if the government can follow through on the commitment to trim deficits later:
• There remains considerable slack in the economy and nearly all forecasts anticipate only a gradual decline in the unemployment rate over the next couple of years.
• Given the elevated risk of recession the U.S. faces today, additional near-term stimulus reduces that risk.
• Given the deleterious effects of long-term unemployment on an individual’s skills and long-term employment prospects, speeding a return to employment is both individually and socially beneficial.
• With monetary policy’s limited room to lower rates and stimulate demand, there is a role for counter-cyclical fiscal policy.

I’ve got one nifty graph on the job gap. The gap is basically a measurement of what jobs have gone missing because of the great recession. I’ll send you t0 another shorty, wonky link.  It’s here at The Economic Policy Blog where it’s argued that the plan--again with all the IFs in tact–makes a step towards closing the gap.  However, the gap is 11 million jobs.  This is what needs to be created to get the economy back to Full Employment.  The propsed plan adds around 4 million jobs.  In simple math, it’s not even half way there which suggests another half ass plan which will be dialed down even further in the sausage making phase.

So, I’ve gone on quite a bit and all of this is quite wonky in places.  It’s way longer than I usually make my posts but I thought that you should get a chance to see as much as possible.  The bottom line for me is that I’m not going to get tingly legs until I see the offsets that will be produced on Monday and until I get an idea of what the Republicans will go for.  It’s not giving an rehearsed speech that’s important, it’s getting the right things into law that matters.