Last week, President Obama gave his State of the Union address, which outlined his goals for the remainder of his term and highlighted aspects of his presidency to date. While I agree that progress has been made on several fronts, be it curbing Iran’s nuclear program, working to provide a temporary resolution in Syria or passing a bipartisan budget bill in December, the president glossed over several issues and offered poor solutions to others. In particular, Obama’s policies to spur job growth, combat long-term unemployment and provide a plan for fiscal sustainability were vague at best. These issues are important not only for millions of Americans but also for the thousands of Brown students who graduate and enter the labor market each year.
Obama announced an executive order that seeks to increase the minimum wage for federal contractors to $10.10 per hour. He also declared support for a broader increase in the minimum wage for all workers. Proponents of the wage hike claim that higher wages for workers will lead to increased spending and demand for goods and services. But this is nothing more than the broken window fallacy. Money spent by workers is no different than money spent by business owners, shareholders and stakeholders. Add this to the looming employer mandate, which levies penalties on companies with more than 50 employees that do not provide their workers with health insurance, leaving businesses with higher marginal factor costs of labor. The net effect will be, and has been, less employment and fewer hours.
The most recent Employment Situation Summary indicated an anemic 74,000 jobs had been added in December — over 100,000 short of expectations. Sure, the unemployment rate dropped to 6.7 percent, but the labor force participation rate also decreased to 62.8 percent — nearly 3 percentage points lower than when Obama took office. Furthermore, when adjusting for lookback periods, the majority of new jobs in 2013 were part-time positions. This is a clear case of economic theory matching with empirical evidence. All else equal, higher input costs lead to decreased quantity in the labor market. The effect is a job market in which full-time employment is hard to find, and college graduates continue to struggle.
The Obama administration must also tackle long-term unemployment. As workers find themselves out of the labor force for extended periods of time, skills tend to diminish and wages upon reentry fall below expectations. To combat this, Obama has called on CEOs of major companies to pledge not to discriminate against the long-term unemployed. Many have indicated initial support.
The issue is that this is not really a policy at all. How does Obama intend to enforce these pledges? Hiring processes are generally opaque, and small businesses employ a substantial number of the nation’s workers. Moreover, is it really incumbent upon businesses to hire workers with decaying skills? I’d argue that instead of propagating misleading numbers about job growth to mask a weak economic recovery, it’s the government’s responsibility to provide an economic climate where workers aren’t unemployed for extended periods of time. Peeling away the administration’s rhetoric reveals a few possible avenues to address these pressing issues. Corporate taxes in the U.S. are nearly 14 percentage points higher than the Organisation for Economic Co-operation and Development average. Additionally, with the proliferation of S corporations, which are taxed at the individual level — not the corporate level — the importance of income taxes increases. Corporate tax rates should be brought down to international levels, giving businesses more liquidity in order to hire employees and put capital to work. Talk of increasing taxes on the “wealthy,” which actually includes many of these aforementioned companies, should be quashed. Our tax code should be simple and sensible at its core. For example, businesses that accrue revenues abroad should pay taxes at the rates of the country in which the particular business operates. Huge amounts of money currently sit overseas because of government failure.
In addressing the popular issues of deficit and debt, Obama pointed to the shrinking national deficit as a positive sign for the future. Again, this rationale is flawed. By historic levels, the deficit is by no means low. Because it’s a flow variable, a deficit continuously adds to our national debt. As a president who attempts to strike fear into Americans over sequestration, takes weeks to come to the table during a government shutdown and leads a party that demeans Republican budget proposals as cutting the safety net in favor of the wealthy, Obama hardly deserves credit for reduced spending.
Over five years into his presidency, Obama is overdue to make serious fiscal reforms. To make the remainder of his term unlike the highly unremarkable first, he must place an emphasis on passing job creation legislation. For example, since the State Department’s most recent report indicated little environmental concern, the Keystone XL pipeline deserves serious consideration. The project would provide many temporary and some permanent jobs. Moreover, this administration must make serious fiscal and budgetary reforms to the tax code, entitlement spending and regulation as a whole. The Greenspan Commission on Social Security proved that the faster and earlier reforms are passed, the greater the net benefit and cost savings. Americans and Brown students alike deserve better.
Jay Upadhyay ’15 is an economics concentrator who wants President Obama to realize who has been in power during the past five years.
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