First, the details. Most of the major news outlets are reporting some of the details from President Obama’s upcoming State Of The Union address. The main points are that those earning between $30,000 and $85,000 will receive up to a $900 tax rebate for child care, student loan repayments would be capped at ten percent of discretionary income, and Obama is implementing a $318 billion dollar spending freeze on discretionary, non-defense related expenditures.
While these measures will make for great for a great speech: “Cut Taxes, reduce the deficit, cut spending, help for the middle class,” they unfortunately do little to tackle the bigger problems facing people today like double digit unemployment, home foreclosures, and a fundamental overhaul of the banking system.
There are issues with all three measures, but let’s tackle the tax rebate and student loan cap first. These are regressive tax measures in that they will assist those with higher incomes disproportionately. For example, a person who graduates from college and takes a job as a teacher earning $30,000 per year will have their payment capped at $183 per month. A person who graduates and takes a job with a finance company and earns $100,000 would have their payment capped at about $520. The difficulty is that a person who makes $100,000 is going to have a much easier time making their payment than the teacher is making theirs. The higher earner is still going to have over $4800 per month. The same issue will arise with the child care rebate if it is proportional to income. The problem with these types of measure is that they tend to help the people who need it least. In the case of the child care credit, people earning less than $30,000 would receive no benefit, and they are the people who need the most help.
The spending freeze is designed to prevent government discretionary spending from increasing with inflation. The Obama administration claims this will save $250 billion over ten years. In essence, the government must cut at least a percentage of the budget equal to inflation for the next three years. Since Mr. Obama claims that this will not include defense spending, what else is left? Education, Transportation, Health and Human Services, Energy, and Housing and Urban Development. Essentially, social welfare and infrastructure. Though I am sure there are reasonable places to cut back in all of these areas, during a recession is not the time. These cuts will go to programs that are needed most during a recession. This will cost jobs, either directly through government layoffs or through eliminating government contracts with private firms. Either way, this will increase unemployment during a recession, which will exacerbate the problem and worse yet, provides no long term solution to the deficit.
--Joe
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