Hey, Washington Fam: We Don’t Need Coal in Our Stockings

It’s that time of the year. Washington is preparing to give America another treat by the end of the month. “Santa Claus is coming to town.” “Peace on Earth, good will to all men.” “Honey, are you buying me a Lexus for Christmas?”  All that good stuff.

Well, Congress and the White House teamed up to put a little coal into our stockings. The House and Senate agreed to extend a payroll tax cut that is expected to give the average worker making $50,000 a year an extra $83 a month. The current payroll tax deduction ends on December 31.

Unfortunately, the plan extends the tax cut for only two months. It’s unfortunate because Americans get to see Congress and the White House go at it again come February. It’s also unfortunate because both the White House and the Congress may have lost an opportunity to address deep structural problems within the economy that lay at the base of recurring problems with national output.

The politics of the moment required that the White House and Congress address the immediate needs of most Americans. Along with the $80 a month for wage earners, the unemployed received an extension of unemployment insurance benefits, and health care providers will not see a reduction in their compensation from Medicare.

The problem is that this particular political action does not provide the economic “umph” needed to increase and sustain national output or income. By economic action I refer to the decisions government and to a lesser extent commerce should be making about the right mix of resources needed for increasing national output.

Increasing output requires increasing the amount of private investment and government investment purchases. For the private sector to increase their rate of private investing, an environment of future expectations of growth must be created.

This is where the federal government should be stepping in, but we are not seeing it.

Creating this environment is necessary if we are ever going to stop kicking the can that we call the economy down the road.

You would think that Washington would understand this, at least the president. President Obama along with every administration official from the secretary of the Treasury to the White House janitor opens up every statement on the economy with the familiar preamble, “When we inherited this economy, we were experiencing the worst recession since the great depression.”

That may have been true, but the follow up should have been, “In order to pull out of this recession, America will have to embark on the greatest level of private investment we have ever seen. We will incentivize this by putting rules in place that make access to capital and credit easier and make sure that a significant amount of government spending goes toward infrastructure investment and research and development.”

Marching orders to increase private sector investment were never really given, and based on the research of Thayer Watkins, professor of economics at San Jose State University, it should have. After investigating the causes of The Great Depression, and other recessions in the economy since, Professor Watkins determined the general underlying theme of a lack of private sector investment pervaded every slow down and was accompanied by the wrong monetary policy on the part of the Federal Reserve. The monetary policy applied prior to each recession may have varied, but at the heart was a decrease in investment in plant and equipment; new house construction; and net inventory investment.

The much talked about prosperity of the Clinton years was driven by private sector investment. Private sector investment grew 11.9% per year during his two terms. During the first three terms, private investment grew at a rate of 8.5% per year. Also, during President Clinton’s first year, private sector investment made up 12.6% of gross domestic product. In year three, private investment accounted for 13.8% of GDP, and in his final year, Mr. Clinton saw private investment making up 17.5% of GDP.

In President Obama’s first three years, private investment has grown at a rate of 8.3% per year. His first year saw private investment accounting for 11.8% of GDP while his third year has seen private investment accounting for 13.3% of GDP.

Mr. Obama could probably see a greater improvement in the private sector investment statistics if he took his focus off of Wall Street and focused more on incentivizing private companies to build out broadband networks and complied with the fast track provisions for the Keystone pipeline. Twenty-five thousand jobs and the infrastructure that comes with the pipeline are nothing to sneeze at.

Real permanent jobs and real infrastructure are much preferable than the coal in the stockings that $83 a month may provide.

Alton Drew is a political economist and commentator. In addition to being a contributing writer at Politic365.com, Mr. Drew blogs at Law and Politics of Broadband, Paying for Dodd Frank, and The American Centrist. Follow him on Twitter @altondrew, become a friend at https://www.facebook.com/alton.drew, or visit his website at www.altondrew.com.

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