Education Reform, Fair Taxes, Job Creation: Obama's Economic Policy is on the Right Track

The U.S. economy grew a disappointing 2.2% in the first quarter of 2012; this sluggish increase drew attention to the urgent need for policy reform to stimulate economic growth.

The most effective way to address slow economic growth is by tackling high unemployment and reforming the tax code to reduce inequality. Such policies will ensure sustained economic growth instead of short-term measures that might temporarily reduce the deficit but hamper the potential for long-term growth. As outlined in President Obama’s 2013 Budget; measures to jumpstart job creation (particularly in the manufacturing sector) include providing education and skill-based training for workers and instituting a more fair tax system.

Unemployment is alarmingly high at its current rate of 8.2%. A cause for greater concern is that between 3% and 4% of the labor force has been unemployed for at least six months. Prolonging their unemployment, risks the possibility that these workers will quit the labor force altogether. Job creation is the only solution. Recent growth in the U.S. manufacturing sector is a positive trend, that Obama has committed to maintaining through tax incentives for manufacturers creating jobs. To ensure that low-skilled workers can also find employment, the U.S. must improve the capabilities of its work force through educational and training programs aimed at skill building.

Youth unemployment at 16.5% demoralizes new entrants to the workforce, and wastes their potential to contribute to long-term growth. College graduates who are unable to find jobs in a weak economy could face depressed earnings for life. Job creation through incentives for firms that hire first-time young workers, as well as the expansion of student aid and reforming student debt, are possible solutions. Making higher education more affordable is a way to ensure that young workers develop the skills required to increase their productivity and develop to their full potential.

Obama’s declaration to raise taxes for the wealthy and implement the Buffet Rule has received much criticism from Republicans and caution from Democrats. While the Buffet Rule requirement for millionaires to pay 30% of their income in taxes is a step in the right direction, it is not the only tax reform required to stimulate growth. Obama must also ensure that the income, capital gains and dividends, and estate-tax rate cuts (enacted in 2001 and 2003 for taxpayers earning more than $250,000 a year) expire as scheduled in 2013. The Congressional Budget office concludes that letting these Bush-era tax cuts expire will strengthen long-term economic growth and raise $800 billion over 10 years.

Steadily increasing inequality is a direct consequence of the current tax system, which grants tax breaks on investment and capital gains from which wealthy corporations and individuals benefit. After the financial crash, the top 1% enjoyed an 11.6% rise in income between 2009 – 2010, while the rest of the workforce saw a gain of 0.2% — as income data from Emmanuel Saez reveals. Unless the tax loopholes that disproportionately benefit the wealthy are closed — for example, $97 billion per year in capital gains and dividends as this article in The Economist points out —inequality will continue to constrain long-term economic growth.

In constrast to my argument, the Republican propositions to stimulate growth include deepening budget cuts and slashing taxes. Evidence from the euro zone crisis demonstrates that budget cuts do not lead to growth: budget cuts have failed to lift Greece, Portugal, and Ireland out of their economic slumps. Most recently, the consequences of austerity in Spain — 5.6 million people are unemployed, the highest figure on record for the country — demonstrates that budget cuts do not lead to growth.

Drastic tax cuts, which include capping the top rate for individuals and businesses at 25%, are also unlikely to lead to growth. GDP growth was significantly higher following the tax increases under Clinton than following the tax cuts under Bush. Additionally, the U.S. already has one of the lowest corporate tax rates among developed nations, and further reducing taxes for the wealthy will only inhibit growth.

Economic growth is impossible without reducing unemployment (through job creation as well as education reform) and creating a tax system that does not favor the wealthy. Policies that reduce inequality will lead to the development of a more productive labor force, and enable long-term, sustainable growth.