President Obama’s American Jobs Act is a road to economic hell.

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Oct. 24 2011 3:36 PM

Read It and Weep

Why the American Jobs Act is a road to economic hell.  

The trading floor of the New York Stock Exchange just after the crash of 1929.
The trading floor of the New York Stock Exchange just after the crash of 1929.

The following article is an excerpt from a piece that originally appeared in Defining Ideas, a Hoover Institution Journal, on Sept. 27, 2011. Richard Epstein will argue against the motion, “Congress should pass Obama’s jobs plan—piece by piece,” at the Oct. 25 Slate/ Intelligence Squared debate.

The dim news about the current economic situation has prompted the Obama administration to put forward its latest, desperate effort to reverse the tide by urging passage of the American Jobs Act, a turgid 155-page bill. The AJA’s only certain effect is to make everything worse than it already is by asking Congress to tighten the stranglehold that government regulation has already placed on the economy.

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That sad fact would certainly elude anyone who accepted the president’s justification for the AJA when he sent the bill to Congress. This bill, he said, will "put more people back to work and put more money in the pockets of working Americans. And it will do so without adding a dime to the deficit." How? Why, by closing "corporate tax loopholes" and insisting that the wealthiest Americans pay their "fair share" of taxes.

What is so striking about Obama’s shopworn rhetoric is its juvenile intellectual quality. His explanation for how the AJA will create jobs is a non-starter because he does not explain how we get from here to there. As in so many other cases, the president thinks that waving a wand over a problem will make his most ardent wishes come true, even when similar earlier efforts have proved to be dismal failures.

One does not have to dip very far into the bill to find trouble. Section 4 of the AJA imposes "Buy American" restrictions on the use of funds appropriated under this statute for work on public buildings. "[A]ll the iron, steel and manufactured goods" used on such projects are to be fabricated in the United States. There are obvious administrative difficulties in deciding what counts as a "manufactured good" for the purposes of the act. But don’t sweat the small stuff. The fatal problem with this form of jingoism is that, in the name of economic efficiency, it forces American taxpayers to pay more for less. That upside down logic may seem sensible to a die-hard Keynesian, but not to ordinary people who realize that deliberate overpayment for inferior goods makes no more sense in the public sector than in the private one.

The universal statutory command to "Buy American" is not capable of rigorous enforcement, which brings us to another problem with the bill: It allows its legislative mandates to be waived when the head of the relevant federal agency finds that its enforcement is against the "public interest," including in hard to calculate cases where such deliberations increase project costs by 25 percent. The basic structure of the AJA thus uses large doses of administrative discretion to defang some of its most unrealistic commands. In so doing, it introduces what I have termed elsewhere the vice of government by waiver, where unbridled discretion creates uncertainty and breeds favoritism.

This process only adds to the cost of legislative enforcement. The real jobs created are for government bureaucrats who determine, under rules to be promulgated later, whether the rule or exception applies. The provision has it exactly backward. The correct piece of legislation should provide that no recipient of funds (assuming there are any) should be allowed to impose "Buy American" preferences—ever.

The bill only gets worse. Sections 101 and 102 of the act continue the policies of giving temporary payroll tax cuts and temporary tax credits to employers who hire additional workers. Cutting taxes, of course, is just fine, but the temporary nature of the cuts is wholly counterproductive. The Obama administration has two unflattering views of employers. First, they are cunning ogres who have to be watched lest they exploit or cheat workers. Second, they must be economic lightweights because they are willing to make long-term hiring commitments on the basis of short-term tax credits, like the one offered in the AJA.

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