Republicans this week outlined their plan for reform in one-page summary entitled "A Pledge to America." Republicans today hope their pledge will do for them what the "Contract with America" did for Republicans in 1994 when the GOP gained 54 House seats and regained control of Congress for the first time in 40 years.
The proposal's goals include immediately canceling any unused funds from last year's $787 billion stimulus program, permanently extending the Bush tax cuts, repealing the new healthcare law, cutting $100 billion in discretionary spending, and freezing the size of the "nonsecurity" federal work force. It also calls to end government control of Fannie Mae and Freddie Mac.
The plan comes at a time when many Americans are questioning the economic policies put forth by the Obama administration. With the unemployment rate stuck near 10%, President Obama two weeks ago announced a new six-year infrastructure plan, which says will create a "substantial" number of jobs and improve the country's transportation system.
Obama's plan comes with a $50 billion price tag right off the bat, and would kick start an effort to rebuild 150,000 miles of roads, 4,000 miles of rail and 150 miles of runway, plus modernize the air traffic control system. The plan also sets up a government-run infrastructure bank to finance the projects, combining tax dollars with private investment for funding.
Republicans immediately balked at the idea of more government spending, even if there needs to be movement on the 9.6% unemployment rate that shows few signs of budging before 2011. They also cringed at the idea of another government run financial entity.
But President Obama promised that any funds directed toward the plan would be "fully paid for," and said the $50 billion expense would be offset by ending tax breaks and subsidies for the oil and gas industry.
President Obama's recent economic stimulus proposal and the continued struggle with ineffective unemployment solutions prompted this reader letter to the Money Morning Mailbag:
So does this new Obama infrastructure investment put many carpenters, plumbers, HVAC, steamfitters, and electricians to work? It seems to benefit asphalt companies, concrete companies, some laborers and civil engineers, inspectors, etc.
In my area the county/state re-laid asphalt on a perfectly good road, structurally sound, etc., by passing other ancillary roads and development streets, one of which has had a small problem area for at least 10 years. It's all show-and-tell.
Even [former U.S. President Franklin D.] Roosevelt's ideas were not enough over that span to pull us out, only World War II created
employment and cranked up our industrial output, albeit bringing inflation with it. At the end of 1945, tons of people were out of work until slowly factories were converted to domestic production.
I remember getting $40.00 a month in the military in 1955 when prices were lower.
Everything being relative, now look - that amount feeds four people minus drinks at TGI Fridays!
- "will"
The full job creation effect of President Obama's transportation improvement plan is still unknown, early indications are that it's more about politics than tangible improvement.
Obama's new proposals employ a front-loaded approach with tax cuts to spur business spending and infrastructure projects to promote job creation.
By far the biggest piece is a new $200 billion tax cut that would let companies deduct the full cost of capital investments in the year the expenditures are made, instead of writing them off over periods of as many as 20 years.It would bump the deduction to 100% from its current 50% through the end of 2011 and would be retroactive to Sept 8, 2010 and last through the end of 2011.
The so-called bonus depreciation measure would cost only $30 billion over 10 years because companies taking the immediate deductions wouldn't be able to write off their expenses through depreciation in years to come.
"Tax cuts for business investment may be more effective in boosting short-term demand if they are temporary than if they are permanent," the Congressional Budget Office said in 2005. "Firms may view them as one-time opportunities for tax savings, which may induce firms to move up some...future investment plans to the present."
Goldman Sachs Group Inc. (NYSE: GS) analysts figure the proposal would probably produce "modest" near-term results because most companies would wait until the end of 2011 to make purchases. The impact also would be "weakened somewhat" if Congress raised other taxes on companies to keep the plan from adding to long-term budget deficits, the analysts said.
Additionally, an accelerated write-off, combined with existing deductions for loan interest, may prompt companies to borrow money for factories, machinery and equipment just to get the tax benefits, Ed Kleinbard, a former staff director for Congress's Joint Committee on Taxation told Bloomberg.
"It's an invitation to arbitrage," said Kleinbard, who now teaches tax law at the University of Southern California in Los Angeles. "You're putting businesses in the same economic position as if you were inviting them to borrow money to buy tax-exempt bonds."
The bonus depreciation measure would be in addition to a $100 billion permanent extension of the business tax credit for research and development, as well as a $50 billion six-year program to fix roads, railways and runways and modernize the air-traffic control system.
Meanwhile, the infrastructure program will focus on modernizing transportation systems and creating jobs starting in 2011. No one can deny that the nation's roads, highways, and bridges need sprucing up. According to the American Society of Civil Engineers, the United States needs to spend at least $2.2 trillion over five years for deferred maintenance of existing infrastructure and investment in new infrastructure.
A national infrastructure bank would remove decisions about federally funded infrastructure projects from the pork barrel politics of congressional earmarking and fund infrastructure in a massive and sustainable way by issuing federal debt to fund infrastructure projects of national significance, according to the Mckinsey Institute.
But even though Obama has indicated support for such a bank since his 2008 campaign, Congress so far has been unwilling to relinquish control of decision making over individual infrastructure projects to an independent agency - and isn't likely to do so anytime soon.
(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.
News and Related Story Links:
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Obama Stimulus More About Politics Than Jobs - The New York Times:
G.O.P. Cites Tax Cuts and Health Care as Main Focus - Reuters:
Republicans present "Pledge to America" agenda - The White House Blog:
The Congressional Republican Pledge to Special Interests - Money Morning News Archive:
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