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America is going back to work!  Or at least that is what we want to believe.  On September 8, 2011, President Obama revealed his $450 billion American Jobs Act to revitalize the United State’s dismal employment market by utilizing a series of tax breaks and funding programs that the administration feels will help decrease the unemployment rate.  Now that the dust has settled, and the details have been revealed, the big question is, will it work?

The plan consists of six principle components[1]:

  • Encourage small businesses to grow and hire through payroll tax cuts, and tax credits; matched with reforms and regulatory improvements making it easier for small businesses to access capital.
  • Performing infrastructure improvements to America’s dated schools, transportation networks, high-speed wireless networks, and utility systems.
  • Funding to prevent the layoffs of teachers, police, and firefighters.
  • An extension of unemployment benefits, and an increase in job training programs.
  • Benefits to the middle class including a reduction in payroll taxes, which is projected to help 160 million American workers, giving the average American family an estimated $1,500 in tax cuts; while also facilitating the refinancing of home mortgages at today’s low rates.
  • The plan will be paid for out of President Obama’s Long-Term Deficit Reduction Plan.

 

I find the plan encouraging in the sense that America is trying to tackle the long term unemployment problem.  Where I am pessimistic, is some of the programs amount to greater short-term stimulus, which does not necessarily address the long-term structural problems in America’s unemployment market.  I think the best aspect of the plan is a focus on job training.  There is currently a mismatch between the skill set of America’s unemployed, the jobs that are currently available, and the wages employers are willing to offer. 

In the California Central Valley there is an abundance of agricultural jobs.  The problem is many of the unemployed do not want to work in agriculture, and do not want to work for the meager wages those jobs provide.  The Mayor of Racine, WI, John Dickert, has publicly stated he is trying to attract companies to his City that will provide $70k/year manufacturing jobs.  Not many manufacturing companies can afford wages that high.  Companies such as Facebook, applaud themselves in how efficient they have become, and how they lack the need for significant human capital additions to grow their business.  While many small businesses are struggling, many large corporations are sitting on behemoths of cash that they could use to create jobs, if they felt the jobs would increase earnings.  Right now, many do not seem so sure.

Lost in the details, the plan took a shot across the bow of municipal bond investors.  In discussing how to pay for the plan, the idea was floated of limiting tax exempt expenditures and deductions, including interest from municipal bonds, to those in the 28% tax bracket or lower.  That impacts individuals making over $200k/year, and married couples making over $250k/year.  First of all, given the current fragmented political process in Washington, I would be very surprised if this manner of funding would be successful.  Beyond the political process, it would be cruel to risk increasing the borrowing costs of municipal bond issuers already working to pair back rising expenses in response to declining revenues.  In the event that it was successful, I think it would have a small impact on municipal bond pricing, however nothing monumental, and would certainly create opportunities.  There is no question it would impact some buyers, but I think municipal bond pricing would still largely be based on traditional variables such as credit risk and liquidity.  Tax-free municipal bonds continue to trade at ratios greater than one to treasuries, which is reflected in the credit, more so than the tax benefits.

Americans need to go back to work.  We need to train our country to be prepared for the jobs of tomorrow, rather than focusing on the jobs of yesterday.  We need to create an incentive structure to make work fulfilling, and worthwhile.  We need to have the product of our employment programs be a productive and efficient workforce.  The incentives of our current programs have not been putting people back to work, and we will not be able to put people back to work overnight.  I feel the quickest way to get people back to work lies in the hands of Americans with excess resources.  For those with excess time, volunteer.  For those with excess funds, spend.  By spending time and money in your community, your community is more likely to grow and be productive.  America will be the product of what it creates.  It is less dependent on an individual, or a political body, but more dependent on America coming together as a whole.

Billy Schmohl
Investment Information Coordinator 


[1] http://www.whitehouse.gov/the-press-office/2011/09/08/fact-sheet-american-jobs-act

 

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