What is Obama Going to Do to Create Jobs and Will it Work?

President Obama spent about two thirds of Wednesday's State of The Union Address talking about the economy. Most of that was centered on jobs. It reminded me of a case of: "Look busy, the boss is watching!"

For most of 2009 the Obama administration and Congress spent their time on their liberal agenda such as cap and trade and the health care bill. They did blow a lot of cash at first for a "stimulus" bill but that was about it for jobs. Then we had the Massachusetts election, and they couldn't help but hear the voters scream: "JOBS!"

Many of the proposals he mentioned weren't exactly new, they were the combination of three different efforts. The first is from The Middle Class Task Force which primarily focuses on supporting the middle class but will have an indirect effect on jobs. Senator's Schumer and Hatch have been working on a plan which centers around payroll tax credits. Senators Durbin and Dorgan have been working on their own plan as well. Details are a bit sketchy but a large component seems to be encouraging lending.

When you dig into the details none of these proposals are really that impressive and some are downright dangerous. The good news is the last time President Obama called for a bill we ended up with another Republican Senator.

So let's take a look at the damage.

The Middle Class Task Force

The proposals from the Middle Class Task Force don't address jobs directly but one in particular will have an indirect effect. One proposal is to nearly double the child care tax credit. This means that child care will be a little more affordable which will make it easier for some people to go out and look for jobs and there's the problem- more competition. If we already have 10% unemployment do we really want to add more candidates to the pool?

For more information on the Middle Class Task Force initiatives you can read my article here.

Schumer and Hatch's plan - Let the job swaps begin

Schumer and Hatch seem to think that business will hire more people if we temporarily eliminate payroll taxes. According to this Washington Post article, they are proposing that we exempt businesses from payroll taxes for new employees that have been previously out for work for at least two months.

First I have to give them some credit, they are recognizing the fact that taxes are a burden on a business, but I think this will miss the mark. Here's why:

Think like a manager for a minute; you may need to do a few shots first. If you were a manager, what is the one thing that is going to make you decide to hire more people? More work which comes from more demand (sales) for your goods and services. So the question we have to answer is: Will this increase sales?

It may, but not immediately. Yes people can spend more money once they start working again and after a few paychecks. But the problem is timing. Managers and businesses will incur the costs much sooner than the benefits. I don't really think managers are going to be willing to take that leap of faith, do you?

Here's what is more likely. Say you are a manager who has an easy-to-replace work force such as retail, simple manufacturing, restaurants, etc. When this tax credit comes along you can immediately reduce your expenses by 6.2% simply by replacing your current employees. You get the benefit now, and who cares what happens later? Chances are you will also be able to hire your new employees for lower wages in the first place.

Think it won't happen? Then why is everybody so worried about jobs going overseas? It happens all the time. It's what managers are supposed to do. Now most won't be quite so ruthless and obvious. But if you're easily replaceable then you better make sure you show up to work on time and never, ever get on the bosses bad side.

The Durbin and Dorgan Plan: More lending - Isn't that what got us in trouble in the first place??

Not much has been officially announced, and there are several rumors about the exact content. Some include incentives for clean energy (nothing new) while other include tax credits and using repaid TARP money to fund small-business lending.

According to Senator Dorgan's press release from December, a large part of the focus will be on making credit available to small businesses. There's that white elephant again, didn't we get into this problem because the government was pushing banks to make loans?

As a recent MBA graduate I understand that businesses need capital, and it often makes sense to borrow. But we can't forget that the banks' job is to make sure that they are making the best use of their capital. If it made sense for them to do more lending in the small business sector they would already be doing it. Again this goes back to how will this affect sales? Are small businesses really turning away customers because they don't have inventory?

So what can the government do?

In reality there isn't much that any government can do to create real jobs. On the other hand, there is a lot they can do to get in the way. Higher taxes, wars on banks, personal attacks on executives, printing money and so on all kill the hiring mood. The best thing Obama can do is to shut up, get out of the way and let the market do its thing.

Sources

Two senators seek payroll tax break for jobs. Washington Post, January 26, 2010
Remarks by the President and Vice President at the Middle Class Task Force Meeting. January 25, 2010
Dorgan leads jobs effort by focusing on small and medium sized businesses. Dorgan.senate.gov