Modest nod to jobs winning Obama few friends

WASHINGTON Tue Dec 8, 2009 12:22pm EST

WASHINGTON (Reuters) - U.S. President Barack Obama's middle-road approach to surging unemployment is likely to face resistance from many quarters, with some accusing him of spending too much and others of doing too little.

In a speech on Tuesday, Obama laid out proposals to alleviate the worst job market since the early 1980s, although he did not outline a concrete price tag for the plan.

The plan includes several measures aimed at small businesses, including:

* Eliminating capital gains taxes for one year

* Providing tax deductions for businesses that hire

* Scrapping fees and boosting government loan guarantees

The president, who hosted a "jobs summit" in Washington last week, also voiced support for investments in infrastructure and clean energy.

"There are those who claim we have to choose between paying down our deficits on the one hand, and investing in job creation and economic growth on the other. But this is a false choice," Obama said.

OBAMA'S WAY

The modest nature of the president's proposal, which effectively proposes very little in the way of new spending, should make it politically palatable, particularly in a Congress controlled by his fellow Democrats.

Many politicians would like to be seen taking action ahead of midterm congressional elections in November 2010. Mounting job losses could threaten Democrats' grip on Congress.

However, the strategy wins him few friends outside of Washington's political middle.

Indeed, by looking too ardently for common ground, the president risks losing the political momentum required to address a labor market crisis that the Federal Reserve predicts will linger at least another three years.

HANDS-ON LEFT, HANDS-OFF RIGHT

Republicans argue the country, which faced a record $1.4 trillion deficit in the last fiscal year, is already too deeply in the red to spend any money on directly creating jobs. Instead, many advocate tax cuts and pro-business reforms they say will spur job creation.

"Americans are running out of patience with politicians who promise jobs, but who deliver nothing but more debt, higher taxes, and longer unemployment lines," said Senate Republican leader Mitch McConnell.

Few Americans doubt action needs to be taken. The jobless rate stood at 10 percent in November, down a bit from October but still at levels only seen once before in the nation's post-World War Two history. The total number of jobless Americans, at 15.4 million, is also near an all-time peak.

On the left, Obama's critics are likely to argue that the problem is simply too large to leave to a struggling private sector. Princeton University economist Paul Krugman argued in a recent blogpost that the effectiveness of direct government hiring should not be dismissed out of hand.

"As it is, job-creation efforts are generally indirect," he argued. "You can make a pretty good case that just employing a lot of people directly would be a lot more cost-effective."

DAUNTING TASK

Long-term joblessness, defined as lasting over six months, has become a pervasive problem. It climbed by 293,000 last month alone to 5.9 million.

"At issue is whether the recovery will be strong enough to create the large number of jobs that will be needed to materially bring down the unemployment rate," Fed Chairman Ben Bernanke said on Monday.

Researchers at the Economic Cycle Research Institute, a business cycle forecasting firm, put the numbers in perspective. For the unemployment rate to fall to its pre-recession low of 4.4 percent, they say, the U.S. economy would have to enjoy an uninterrupted expansion lasting until 2020.

"The prospects of getting 10 years of growth are very low," said Lakshman Achuthan, ECRI managing director.

MARKET FORCES

As for financial markets, the likely impact of any new measures will be minimal, and markets showed little immediate reaction to Obama's announcement. Since Obama decided to go with a trimmed-down jobs creation proposal, it should not put much downward pressure on the dollar or government bonds.

At the same time, the new measures are too modest to offer any significant boost to stocks, which are up some 60 percent from their March lows but seem to be having difficulty making further strides as investors question the recovery's strength.

(Reporting by Pedro Nicolaci da Costa; Editing by Eric Beech)