Nine Point Eight! Are You Convinced Yet?

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by Tony Lima
December 3, 2010

“President Obama had scheduled a speech about the economy this morning, but instead he went to Afghanistan.”[1] No wonder.  If I was president I wouldn’t want to be in the country today either.

Today the November labor market report was released.  The, um, highlight was the unemployment rate: 9.8%.  Corporate profits are soaring and the economy is growing, albeit slowly.  So where are the jobs?

Let’s review my earlier posts, specifically March 27. [2] There I analyzed the impact of the health care bill on the economy.  My summary conclusion: the health care bill included tax increases of about $32 billion.  Excerpts are at the end of this post.  Those tax increases have pretty much kicked in.  (The exception is the increased tax revenue that will supposedly be captured by requiring businesses to file 1099 forms for any firm or individual with whom it does more than $600 per year in business.) What my earlier article didn’t focus on was the uncertainty created by the health care bill and the financial reform bill.

Taken together, these two laws will require writing about 600 new rules.  Many of these rules will impact the cost of employees.  And businesses don’t know what the rules will be.  Small businesses, in particular, are flat-out scared – nervous about future unknown liabilities for employees, worried about the expiration of the Bush tax cuts, and generally just worried about the prospects for their futures.  Would you hire new employees in this environment?  When, at every turn, the president or a member of his staff demonize businesses?  When decisions made in Washington, D.C. have a distinct “shoot from the hip first, ask questions later” flavor?

Neither would I.

Excerpts from my March 27 post:

“So here we are 45 years later.  The economy is in a deep recession.  If we’ve learned one thing since John Maynard Keynes published The General Theory of Employment, Interest, and Money (1936) it’s this: don’t raise taxes during a recession.

Yet that’s exactly what the recently-passed health care bill does.  To support the accounting fiction that the government budget deficit will be reduced, many of the taxes and fees begin during the next two years. The majority of benefits don’t kick in until 2014.  Is this yet another instance of presidential ego trumping sound economic policy?

As of March 27, various corporations have announced they will recast their earnings to reflect the fact that healthcare prescription benefits offered under their employees’ insurance plans will no longer be tax deductible. According to the Wall Street Journal article cited in the footnote, “Mr. Zion of Credit Suisse estimated in a report this week that companies in the S&P 500 index will rack up a combined $4.5 billion charge due to the change in the value of the tax asset.”  That’s the equivalent of a $4.5 billion tax increase.

Let’s consider another small part of the new taxes.  Beginning in 2012 there will be additional taxes imposed on individuals with wage income over $200,000 ($250,000 for married couples filing joint returns).  There are two parts to these taxes.  First, an additional tax of 0.9% will be levied on wages and salaries in excess of $200,000 ($250,000).  Using IRS data for 2007 together with some educated guesses, total income above $200,000 was about $1,382,126,976,000. That implies a tax increase of about $12,439,000,000.

The second tax extends Medicare taxes to cover “Modified Gross Income.” Basically, modified gross income is wages and salaries plus interest.  The phrase “exempt from taxes” refers to the exemption of non-employment income from Social Security and Medicare taxes.  The purpose of this clause is to extend the 3.8% Medicare tax to cover all interest earned by anyone making over $200,000 ($250,000). … For the year 2007, that total for households with income above $200,000 was $196,513,160,000.  The total tax increase for that year would have been $19,906,642,864.  Call it $20 billion, bringing the total tax increase to $32 billion.

My conclusion is simply this: despite the fiscal stimulus (much of which still remains unspent), the U.S. economy will continue in recession through 2013.  At best we can expect sluggish growth.  The tax increases in the health care bill combined with the expiration of many of the Bush tax cuts in 2011 are two factors.  But there’s even more.  Fiscal policy is as much about expectations as actual changes in tax rates and government spending.  Right now businesses and individuals expect higher taxes to continue for the duration of the current administration.  Therefore I expect the recession to continue at least until November, 2012 and possibly even longer.”


[1] Heard on NPR’s Morning Edition December 3, 2010.

[2] http://gonzoecon.com/2010/03/the-health-care-bill-disaster-for-the-economy/

4 Replies to “Nine Point Eight! Are You Convinced Yet?”

  1. rami nasri

    Professor Lima : so according to your article, can we conclude that the unemployment rate is government made ??????. I mean it is a fact what you mentioned that this recent economic environment is hostel to businesses. Yet, the current administration claims that if it was not for the health care bill and the economic stimulus, the recession would have been worse. My question ( if you can answer me) is: what would have happened if the government did not protect the financial institutions and bailed them out ? what would have happened if the government did not intervene this much in our economy?
    Thanks

  2. Tony Lima

    Rami, I cannot tell a lie — neither I nor anyone else can say what would have happened without the various bailouts, the “stimulus” bill, and everything else that’s gone on. I’m pretty sure the financial bailouts were necessary. Without them, Bear Stearns, Goldman Sachs and Citibank might have pulled down most of the U.S. financial system. The stimulus — I’ve written about it in other posts here. The real problem wasn’t the size of the stimulus. It was the timing of the spending. Even today, nearly 18 months after the stimulus was passed, there are still some funds unspent. If you’re gonna stimulate the economy, spend the money fast. Unfortunately the projects that were chosen were slow to start (at least one took a full year before the bureaucracy issued its first contract), and way too slow to spend the funds once they were allocated. ProPublica.org has done terrific work tracking the sluggish way stimulus funds were actually spent.

    But my real focus was the unemployment rate. I’m sure you know labor economics. The modern theory of labor says that workers aren’t just replaceable parts that can be discarded and acquired at a moment’s notice. Instead, there are search costs, screening costs, hiring costs, and training costs. Probably a few others I’ve forgotten, too. Taken together, a worker is more like a piece of capital equipment. That explains (among other things) the “labor hoarding” phenomenon that goes on during recessions. It also explains why productivity has been increasing rapidly during the last year.

    What businesses are worried about are the uncertain future costs anyone they hire today will bring along. The health care bill is a recipe for higher health care costs. (Evidence: check out my article about Jonathan Bush and see what he has to say.) Unfortunately, the health care bill will require bureaucrats (including the IRS) to write about 423 new rules. Right now no one knows what those rules are and (important) what costs they will impose on business. And don’t forget the added 200 or so rules that go with the financial reform bill.

    Unemployment will stay high until a lot of this uncertainty is resolved. Given the current administration’s apparent understanding of economics (zilch), that could take us right through the 2012 elections.

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