Oh, Stop It! Obama-GOP Deal to Extend Bush Tax Cuts Wont Create 3.1 Million Jobs.

The Center for American Progress has published estimates showing that over the next two years, the Obama-GOP deal to extend the Bush tax cuts will “save or create” 3.1 million jobs.

Not a chance in hell.  Not even one teensy, tiny, modicum of a chance.

Okay, so first of all, let’s dispense with the obvious… no one will ever be able to asses the “saved” jobs part of that sentence, any more than Bush was able to demonstrate the number of domestic terrorist attacks his administration’s policies prevented.  I mean, if two yeas from now front page unemployment is still hovering around 10%, I suppose one could say… “Well, it would have been 12% without the extension of the tax cuts,” but that’s the kind of thing one does best by saying to a five year-old. After age five, my own daughter would have turned her cute little nose up at that sort of leaky unprovable logic.

But as far as the tax cuts “creating” any jobs… well, I suppose the most important question I have is: Does anyone know if there’s a place I could go to bet real money against or for these types of things.  Because I’d view a bet against this inane estimate as a sure-fire way to get my half a million in lost home equity back, and bet the farm, the IRA, watches and jewelry, old silver dollars I have laying around… anything I could liquidate.

When I saw the Center’s 3.1 million job creation estimate, I just stared at it wondering if it was a hoax of some kind, but then I realized that it was real, and sat there wondering;  Who in the world would even think such a thing?  Were they kidding?  Were they high?

Upon reading the piece written by Peter Cohan for Daily Finance, I was presented with the answer to at least two of my questions, and quite likely my third as well.

According to Cohan, and I have no reason not to believe him, the jobs creation forecast was “based on the Congressional Budget Office’s estimate that each 1% of GDP growth adds a million new jobs, and using calculations from the CBO and economist Mark Zandi about how much of each type of stimulus spending will boost overall GDP.”

And that, my friends, is pure and uncut forecasting crack cocaine… of the type our politicians have become addicted to over the years.  I imagine this sort of crystal ball crap goes on all the time, and that perhaps it just seems like it’s more frequent today because of the disparity so readily seen between the forecasts and the stark reality of life in America today, and for the next two years.

GDP?  Which GDP?

So, the GDP is the Gross Domestic Product, and to begin with, there are three ways GDP can be determined: by product… by income… or by expenditure, with the product approach being the most straightforward.  To use the product approach to determining GDP, you just determine the sum total of all the products and services produced domestically in this country.

The expenditure approach to determining GDP, on the other hand, is based on the idea that everything produced in this country has to be bought by someone, and therefore the sum total of all expenditures must be equal to the total product being produced.    And the income approach to GDP, which is obviously the one used by the CBO, postulates that the incomes of “producers,” must be equal to the value of their products produced, so this approach calculates GDP by taking the sum of all producers’ incomes.

Best that I can tell, the CBO’s idea that “for every one percent in GDP growth, 1 million new jobs are created,” might be something used by some sort of broad based forecasters doing some kind of planning upon which no more meaningful method of forecasting would be available or practical.   But, the way it’s being used here, well… it’s damn close to being utter nonsense.   And it’s the kind of nonsense that should sort of slap you across the face.

Cohan’s article says that the Center starts with the CBO calculations and then works with economist, Mark Zandi. in order to take a shot at breaking down the number of new jobs likely to be generated by the different segments of our economy as a result of the tax cut extension.  And here’s what the Center and Zandi came up with this year, looking out two years into the future:

  • Extending the broad-based Bush tax cuts (for the bottom 98%): $360 billion cost, 940,000 new jobs
  • Payroll tax cuts (2 percentage-point reduction): $120 billion cost, 700,000 new jobs
  • Unemployment insurance extension: $56 billion cost, 520,000 new jobs
  • Tax cuts for top 2%: $120 billion cost, 290,000 new jobs
  • 100% expensing/bonus depreciation: $180 billion cost, 260,000 new jobs
  • Refundable low-income tax credits: $38 billion cost, 220,000 new jobs
  • Business extenders such as R&D tax credit: $80 billion cost, 160,000 new jobs

You Can’t Eat a Tax Cut

Did anyone ever offer you this sort of advice when you were thinking of buying something based on its tax deductibility?  Like perhaps… you might as well lease the car, that way you can write it off.  Or, you might as well finance it, you can write off the interest.  But you can’t eat a write off, right?  I mean, just because you can deduct something from your taxes next year, doesn’t mean you should be paying for it this year.

Well, think of tax cuts like that for a moment.  Let’s say you and I own a retail electronics chain… Best Buy, perhaps… if we’re going to dream, we might as well dream big…and our sales have been hit hard by the Great Recession that began in 2007, and in response we’ve cancelled the openings of new stores, delayed expansions into new product and service offerings, laid off all excess personnel, reduced executive bonuses perhaps… you know the drill.  Money’s tight, and we’re experienced business people… we’re running lean and mean till we get through the storm.

But what’s this?  A tax cut… a tasty one at that.  It’s Bush-flavored, the best kind.  Gee, we say to each other… what should we do with our windfall created by the deal struck between Obama and the  GOP?

“I have an idea,” I say…”let’s use it to hire more people.”

“Why would we want to do that,” you reply.  “That would just increase our payroll costs and reduce our profits, unless you’re saying that tax cuts will somehow get more people to buy flat screen televisions.”   How would it increase demand for our products and serivcers.

“Good point.  How do we get more people to want to buy flat screen televisions?”

“I’m thinking creation of jobs would be the prerequisite for any sort of increases in demand, we might see.  Because people have lost a lot… and they’re not going to borrow their way back to prosperity this time because there’s so little credit available.”

“Right… And I sure don’t see them spending the cash they have because we got a tax cut.”

And scene…

And if that’s not illustrative of what’s so goofy about the CBO’s formula this time around, just consider a few of the most absurd bullets above:

  • Bonus tax cuts for top 2%: $120 billion cost, 290,000 new jobs?

Hello?  Reduce the taxes owed on their bonuses by 2%?  And create  290,000 jobs?  Why in the workd would that happen?  Last year I remember Goldman Sachs paying out some pretty hefty bonuses and taxes were pretty darn low then… would someone like to show me the jobs they created last year.  Oh don’t worry, I don’t expect to see 290,000 like this forecast shows because this one is the result of the 2% tax cut, but could someone show me the Goldman Sachs’ bonuses creating say… oh, I don’t know… what would be fair… okay… how about… ANY JOBS AT ALL?

And how about the star of the tax cuts?

  • Extending the broad-based Bush tax cuts (for the bottom 98%): $360 billion cost, 940,000 new jobs

I’m sorry, but this one is just not even a little debatable at this point.  The proverbial jury has long-since come in, as they say.  The Bush tax cuts may have done a  number of things, but creating jobs for the bottom 98% is not one of them.

And while we’ve got our critical thinking caps on, why not take a look at this one:

  • 100% expensing/bonus depreciation: $180 billion cost, 260,000 new jobs

Okay, this one is actually easy to understand if you understand depreciation.  It’s not a hard concept to get your arms around.  Businesses have expenses that they expense 100% in year one because their useful life expires within one year.  But other purchases businesses make, such as those for capital equipment or vehicles, are around over some number of years after which they have been fully depreciated and the assumption is they will need to be replaced.  Think of bonus depreciation as being “extra” amounts of depreciation that can be expensed at the rate of 100%.  When Dubya was in office, he had this type of deal on vehicles that weighed more than 6,000 pounds, you could deduct 75% in year one… so, I bought two.

Okay, now this seems like a good moment to shock everyone as to my actual position on this extension of the tax cuts for the next two years… I’m not opposed to the deal Obama made.  But I’m not for it because of its propensity to create jobs… that’s just a stupid lie that politicians use to keep us from storming the castle.

Now don’t get excited… I’m not saying that I think rich people shouldn’t return to paying the rates they paid during the Clinton presidency… they should… and they whine far too much about the issue.  But this isn’t the best moment in time that I could think of to raise taxes on anyone.  Our economy is nothing if not delicate and any tax increase must pull cash from the economy by definition.  And that’s just a fact as well.

I realize that Obama was ready to allow the tax cuts to expire now, but he’s also okay with allowing another 4-5 million homes be lost to foreclosure next year, and the same number the year after that.  And that’s very poor economic judgement as well, in my mind.

So, the fact that he was ready to allow the Bush tax cuts to expire doesn’t make me feel all warm and fuzzy inside that he would be exercising good judgement on this issue either.  And were he to find out later that he had been wrong to let the cuts expire now, it wouldn’t just be a small mistake… we’re on a tight rope here, and without a net below us.

Obama’s track record when it comes to our domestic economy, is poor.  So, with that in mind, I say erring on the side of caution is probably the right thing to do… don’t let the tax cuts expire now.

You see, the type of tax incentive that allows for the expensing of bonus depreciation is not a bad thing… it does give businesses an incentive to make capital expenditures now, and that won’t hurt the economy any.   But it’s also not going to have the same sort of impact it would have in past years, because of things like broken credit markets, and weak demand ahead no matter what.

And as long as the housing market is allowed to remain in free fall, and as long as we’re too scared to take over another bank, clean it up and resell it to the private sector… well, the longer we’re gong to see consumers sitting on the sidelines, choosing not to repeat their past behaviors… and that makes the future less than clear, perhaps, but not pretty.

Cohan’s article, which is worth reading by the way, points out that this forecast uses the same math that was used by the Obama administration when they said that the first economic stimulus would “save or create” 3.5 million jobs.  The CBO has reduced that overly enthusiastic forecast to something vague, but the fact is he was wrong then and he’ll be wrong again this time.  That doesn’t mean compromising with the GOP on this issue was so wrong, but this had better not be the only thing he does job creation-wise.

Because this is mostly a political hot potato type of issue than it is some sort of magic bullet.  In fact, it’s more than likely to be a cap gun.  So, to get an idea of how much impact the deal will have, make your finger into a gun and say… BANG!

Mandelman out.


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