Economic Outlook: The Long and the Short

Online, December 7, 2010 (Newswire.com) - Everything but a pink slip in Washington comes with the endearing tag line that it will create jobs, tax cuts included, of course.

President Barack Obama said Monday that the compromise with Republicans on the George W. Bush era tax cuts, extending them for two years while providing jobless benefits for millions, would "spur our private sector to create millions of new jobs and add momentum that our economy badly needs."

There is some truth in that, but those with calculators understand that providing a break for someone without a job invariably means that break will be spent in the grocery store by the end of the week, keeping the dollars circulating. That same break for someone earning $250,000 a year or more - the tax bracket that Republicans nailed to the wall with Monday's compromise - often has a different destination. It is more likely that the wealthy will take that windfall out of circulation, stuffing it under the mattress or placing it in a savings or investment account. More likely, it might go toward a long-term investment; nothing wrong with that, but the economy needs a shot, not a chaser, at the moment. Some dollars just work harder than others. That's the bang for the buck theory of economics Some refer to it as trickle-down economics -- trickle being the operative word.

Apply the same reasoning to businesses and you have corporations sitting on mountains of cash. These days, when the urge to spend strikes, they buy other corporations, as evidenced by plenty of headlines these days. Those efforts to streamline operations, however, result in layoffs, not hiring.

In contrary fashion, small businesses are doing most of the hiring. Automatic Data Processing Inc. in a monthly report of private sector employment said companies with 500 or more workers added 2,000 jobs in November. That would be the likes of Microsoft, Apple, Hewlett-Packard, Caterpillar Inc., McDonald's Corp., Pfizer, 3M Company, Bank of America, Goldman Sachs, Intel, the big three car companies, General Electric, Verizon, Citigroup -- you name it, those guys, and not just those guys but all of them combined. Companies with under 50 workers -- mom and pop stores, local tool and die shops, those privately owned firms around the corner -- hired 54,000 in the month.

The pivotal compromise in the tax agreement that Obama said was "not perfect" was a 13-month extension of jobless benefits for long-term unemployed. Callously, leveraging survival benefits for unemployed workers -- many displaced by a financial crisis brought on in part by mega-wealthy bankers -- in order to preserve tax breaks for the wealthiest 2 percent of wage earners has liberals seething.

"They've given up on this critical issue without a fight," said liberal lobbying group Moveon.org an email to members, The Wall Street Journal reported.

Rep. John Conyers, D-Mich., called the deal "legislative blackmail," and said it would be "vehemently opposed by many, if not most, Democrats."

But if everything tangible has a number of jobs attached to it, so does everything intangible, which is to say not doing anything, which would have allowed the tax cuts to expire across the board, would have cost the economy a million jobs, Obama said.

He took the practical approach. "I am not willing to let working families across this country become collateral damage for political warfare here in Washington. The American people didn't send us here to wage symbolic battles or win symbolic victories," Obama said.

In the short-term, markets in Europe turned higher on the compromise. In midday trading, the FTSE 100 index in Britain added 1.3 percent, while the DAX 30 in Germany rose 1.12 percent. The CAC 40 in France gained 2.08 percent, while the Stoxx Europe 600 rose 1.27 percent.

In Australia, the S&P/ASX closed up 0.82 percent. In Japan, the Nikkei 225 index shed 0.26 percent, while the Shanghai composite index in China rose 0.65 percent. The Hang Seng index in Hong Kong added 0.82 percent. In India, the Sensex index lost 0.23 percent.

By ANTHONY HALL, United Press International