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Robert Pollin: Infrastructure investments positive if passed, cuts to Medicare, Medicaid and Social Security more likely

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. And in Washington on Thursday night, President Obama gave his jobs speech.


PRES. BARACK OBAMA: The purpose of the American Jobs Act is simple: to put more people back to work and more money in the pockets of those who are working. It will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. You should pass this jobs plan right away.


JAY: Now joining us from Amherst, Massachusetts, is the codirector of the PERI institute, Bob Pollin. Thanks for joining us again, Bob.


JAY: So some tax cuts, some money for an infrastructure fund. Not really clear how much in each way, in each place. The big issue seems to be, emphasis seems to be on some form of payroll tax cuts. And then this is all going to be paid for by bigger cuts–mostly, it seems he’s suggesting, in Medicare and Medicaid. What’s your take on all this?

POLLIN: Well, the speech is good insofar [as] it at least acknowledges that we’re in a jobs crisis. If we go back, roll the cameras back to one month ago, we weren’t even talking about that in the mainstream Washington circles; we were talking about the debt ceiling and we were talking about the debt crisis–no mention whatsoever of jobs. So at least we’re on the terrain of talking about jobs. Now, the main proposal and probably the only one that is going to be significant and will pass is the proposal to extend and even maybe increase the tax cuts on payroll taxes. The payroll tax is otherwise known as the Social Security tax. It’s the money that is collected both from workers and from businesses to finance Social Security. Now, in the past that has been inviolate that that would not ever be touched, because of the commitment to sustain Social Security. The idea of cutting the payroll tax is, of course, popular in the sense that while it’s a tax cut, it will put money into people’s pockets, because people had paid 6.2 percent of their wages in Social Security taxes–businesses paid the same amount to match the workers’ payments–this’ll put money back in their pockets. We’ve had a year’s worth of payroll tax cut. Obama suggested even deepening the tax cut, and there was no specific number in his speech. I’ve seen a number something like 3.2 percent. So that could create some short-term stimulus. At the same time, it is putting in jeopardy the future of Social Security. It is not, therefore, the best way to pursue a stimulus program.

JAY: Now, the other part of it is the–he talked about paying for all of this through what he called modest reforms to Medicaid and Medicare. What do you think of that?

POLLIN: Well, he said Medicare and Medicaid and Social Security. So we have a kind of synthesis here where we are, first of all, moving against the basic revenue source for Social Security, the payroll tax, and then we have this long-term agenda in which he’s talking about reforming, that is, reducing benefits to recipients of Medicare, Medicaid, and Social Security, on the premise that the country is facing this overwhelming debt crisis and that the way to pay for the debt crisis is on the backs of working people whose living standards are tied to Medicare, Medicaid, and Social Security. So that in my view was an extremely unfortunate combination of proposals.

JAY: Now, he goes a little further. I guess this is connected. The $1.5 trillion that they made in this deficit ceiling deal–he’s now suggested, let’s make that even higher, in terms of the amount of cutting, in order to pay for all this. So, I mean, once again he’s adopting the underlying logic that the problem is the overall debt. And the other–the issue of jobs and any really direct jobs program has not even been talked about. Like, it’s all through the private sector and tax cuts. The idea of straight hiring, he certainly didn’t use that language. Go ahead.

POLLIN: Well, I mean, he did talk about infrastructure.

JAY: Yeah, but always through the–he emphasizes private construction companies are standing by. The idea of some kind of public works program is not part of the vocabulary.

POLLIN: Well, public works programs could give out contracts to private contractors. So, I mean, I don’t have quite as harsh a view on that specific thing. He did talk about public schools expansion, teachers. And these were–sounded like the types of things that are going to be extremely modest. It is consistent, at least in terms of the rhetoric and the placement of these ideas in the speech, with proposals he’s made before, which, you know, sound like motherhood and apple pie–how can you be against getting jobs for teachers? But the real issue is: how much money are we going to spend on public school teachers? How much money are we going to spend to defend the quality of public schools or enhance the quality of public schools? If we’re talking about real money to do that, that will be a good source of job creation. In fact, if you put one against another, the various sources of government spending or tax cuts as a source of immediate job creation, it turns out the single best one is spending on education, where you get almost 30 jobs per $1 million of expenditure. Compare that with spending on tax cuts. That will get you about 14 jobs per dollar of expenditure [sic]. So spending on education is twice as effective for the same amount of money. That, of course, was not brought up in the speech.

JAY: But I guess the problem here is, if you pay for it through Medicare, Medicaid, and Social Security, then what have you accomplished?

POLLIN: Well, absolutely nothing, except, presumably–and of course we’re going to have to see the details tomorrow–presumably he is proposing that these payments and these cuts take place after we’re out of the recession, not immediately. If he’s talking about cutting things immediately in order to pay for a payroll tax cut, then yes, even as short-term stimulus it’s a total wash, it won’t do any good at all, and it will be a major step toward the dismantling of Social Security, the modest but effective program that we’ve had since the 1930s.

JAY: Yeah, I think he does specifically say any of these bigger cuts need to be phased in in a way that they don’t undercut the stimulus value. So he–what did you make of the portion of the speech on taxing the wealthy?

POLLIN: It was vague, and it was coupled, as you said, with the notion of cutting taxes for corporations. So at the very best, as a long-term source of revenue, it’s going to be a wash if we’re cutting taxes on corporations. He did not–he mentioned Warren Buffett’s proposal to increase taxes on wealthy people such as himself. Obama didn’t really say what he was going to do in that direction, and he completely, of course, neglected what I think is the single best way to raise tax revenues now, which is to tax Wall Street transactions. A Wall Street transaction tax equivalent to a modest sales tax that all Americans pay when you go to the store would easily raise $150 billion a year and would not affect any kind of essential activity of financial markets and financing productive investments. In fact, it would probably enhance their effectiveness.

JAY: Yeah, it’s interesting. The German finance minister, who’s one of the engineers on the European austerity train, even he supported a financial transaction tax. But let’s talk about maybe what the real–in terms of economic policy, the real powerhouse in Washington, because everyone thinks that a lot of this isn’t going to pass anyway, except for, as you say, the tax cuts. The real powerhouse in terms of what might affect the economy is what’s going to come out of the Fed. What’s happening there?

POLLIN: Well, you know, there’s some interesting chatter. Nobody ever really knows what’s going on inside the Fed. And what has happened, actually, interestingly, over the last few weeks is that various members of the board of governors of the feds, the one that actually make the decisions, have been openly fighting in the press as to where the Fed should go. But the story today in the leading financial press–The Wall Street Journal and The Financial Times–was that Fed chairman Ben Bernanke is eager to move to a more aggressive pro-jobs policy at the Fed. Now, what are the tools they have? One that was talked about in the news stories was that Bernanke would try to directly lower long-term interest rates. When Bernanke announced last month that they were going to set the short-term rate at zero for two more years, that’s just the short-term rate. And we know over the last two and a half years we’ve had a zero short-term interest rate and it hasn’t led to a recovery. We need to pull down the rate that businesses would pay. That would do more than any tax cut and put more money in the hands of businesses that want to invest than a tax cut. Secondly, there is also talk, at least in these news stories, that the Fed is going to stop paying interest to banks for holding cash reserves. Right now–and, again, we’ve talked about this before–I think the single biggest story around all this is that commercial banks are holding an unprecedented $1.4 trillion in cash reserves that they accumulated at zero interest rates. That’s 10 percent of US GDP [crosstalk]

JAY: And let’s just be–just to remind people, this has accumulated essentially ’cause they got it from the Fed.

POLLIN: They got it from the Fed because the Fed charged zero interest rates. And on top of that, once you’ve got the money, the Fed would pay you 0.25 percent, just for doing nothing, just for sitting on cash. So Bernanke has at least–or at least the news stories say that Bernanke is thinking about eliminating that 0.25 percent tax, which in my view would be a major (if small) step forward toward the idea of actually setting a positive tax rate on excess bank reserves, forcing the banks to start thinking about lending to small businesses at low interest rates. And, again, that to me is the single most effective policy, for, among other reasons, it doesn’t cost the US taxpayer anything. It doesn’t cost anything at all. It’s a way of giving–they gave the banks free money; now let’s get that free money into the economy.

JAY: Thanks very much for joining us, Bob.

POLLIN: Thank you.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.