Corporate America Is Hoarding Tons of Cash: Why In the World Would Obama Think About Giving Them More Tax Cuts?
One would think that an almost daily barrage of grim economic news about working America might inspire a sense of urgency among policymakers, prompting them to think boldly about how to get the country moving again.
Meanwhile, the companies in the Standard & Poor's 500-stock index are sitting on a record $960 billion in cash -- the Wall Street Journal notes that "there is a cash crisis in corporate America—although it comes not from a shortage of the stuff, but from a surplus." Given that the federal government has been collecting the lowest share of the economy in tax revenues since 1950 during the past few years, one might also expect that giving American businesses more "tax relief" wouldn't be a terribly high priority.
But this is America, and the White House is reportedly courting big Wall Street donors to help finance Obama's re-election campaign, so it's considering the merits of offering a temporary cut in the payroll tax paid by businesses. It's an idea that might stimulate the economy a little bit and could well gain bipartisan support, but it's also fraught with risk and represents yet another sign that the administration has thrown in the towel in the larger debate over how to recover from a blistering recession.
The payroll tax finances Social Security and Medicare. It's divided evenly between employers and workers – each pay 6.2 percent. Last December, Obama cut a deal with the Republicans to give workers a break in 2011 – we're paying 4.2 percent this year – which put a few more dollars in people's pockets.
Businesses want a piece of the action as well. According to the Wall Street Journal, “For years, small-business advocacy groups have called for a payroll tax holiday for employers... The National Federation of Independent Business, a lobbying group in Washington, D.C., has been a vocal proponent” of the cut. So, there's a good chance of getting some GOP support for the measure.
No details have been released, and Bloomberg reports that the idea is “one of several” the White House is kicking around. Presumably, it would be a short-term measure like the employee-side tax break passed last year. “A cut in the employer side of the payroll tax could absolutely help accelerate job creation,” Christine Romer, the former chair of Obama's Council of Economic Advisers, told Bloomberg. “In addition to the usual beneficial effect on demand, this tax cut would make hiring less expensive.”
And that's where the rationale goes off-track. The biggest problem facing the economy remains consumers' lack of appetite for spending money – lack of money to spend is a better way of putting it – and the employee-side break addressed that problem to a small degree. But businesses are sitting on tons of cash right now – corporate profits are at an all-time high. They're not hiring in this country because they don't see a lot of customers breaking down their doors to buy their goods and services. Instead, they're giving investors fatter dividends, buying up smaller firms and investing in their overseas operations – American multinationals are creating plenty of jobs abroad.
And while Romer is right that such a cut would make hiring people cheaper, that too appears to be a solution in search of a problem; incomes have been stagnant for a decade, and during 2009 and 2010 we saw the biggest two-year drop in labor costs (the combination of wages and benefits) since 1962-'63.
The White House's calculus is not difficult to gauge. Cutting the employer's payroll tax would have some small stimulative effect, it would just be a poor bang for the buck. The administration is looking at waging the 2012 campaign amid high unemployment, and they're willing to take whatever economic boost they can get past the GOP-led House and a potential Republican filibuster in the Senate. They've also decided that appearing “serious” about reducing the deficit is key to winning over independent voters.
That might make good sense in a rational world in which intellectually honest parties made serious arguments about how best to further the common good. That is not the case, however, and the real danger in implementing a “temporary” payroll tax break is that when it is set to expire – perhaps in the heat of an election – conservatives will accuse anyone who doesn't vote to extend the cuts, perhaps indefinitely, of “raising taxes” on “job producers.” This is what has happened with Bush's “temporary” tax cuts – cuts that were set to expire last year, but remain on the books despite the fact that they represent the biggest driver of the federal deficit over the next decade.
If the “temporary” cut to the payroll tax were similarly extended, it would result in turning a completely false conservative talking point into a reality. In the real world, Social Security's finances are not only very solid, the program also hasn't added a penny to the federal deficit. If the loss in payroll tax revenues were made up out of the general fund (as the workers' payroll tax holiday is structured), that would change the program's long-run financial picture dramatically. Suddenly, Social Security would be adding to the deficit, which would make defending the program that much harder.
That the White House would consider making such a gamble for such a modest potential payoff isn't just a sign that they underestimate their opponents' tendency toward scorched-earth tactics; Obama's advisers appear to have genuinely embraced some of the corporate right's most dubious arguments. As Dave Johnson noted last week, “White House economic adviser Austan Goolsbee argued against efforts to boost the economy, saying that the jobs market 'is on a trajectory of improvement'," and Gene Sperling, another top adviser, embraced the ludicrous notion that employers aren't hiring because of some ill-defined lack of “confidence” caused by high deficits.
Even worse, last week the White House rejected a modestly priced jobs bill Senate Dems had cooked up, saying that it was “too expensive.” At issue was the fact that it would have cost $175 million dollars more than the White House had requested for an existing jobs program – that's about what it costs to keep troops in Iraq and Afghanistan for nine hours.
This is all consistent with the administration's decision to try to thread a difficult needle on spending, deficit reduction and job creation. Rather than push back on the core idea that cutting deficits in the midst of a painfully slow “recovery” is anything but madness, they've tried to walk a line that says, "yes, the deficit is a pressing problem, but we'll address it in ways that are less painful than our Republican adversaries."
And the problem with that is simple economics: inflicting deep cuts to the public sector to finance more tax cuts for the wealthy is bad policy that can't lead to anything other than more economic pain for America's working majority.