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U.S. President Barack Obama yesterday (Wednesday) finished unveiling of a $350 billion stimulus package that the White House hopes will assuage the fears of troubled homeowners and create jobs. But with midterm elections looming and Congressional Democrats expected to sustain heavy losses, it's unlikely the plan will even get passed – much less generate any meaningful economic growth.
Indeed, the true aim of Obama's new stimulus is to put Republicans in a difficult position.
"The president has changed the conversation from whether to renew or terminate President Bush's tax cuts to his own tax-cut agenda, and is promoting a couple of business-friendly proposals that Republicans have previously promoted," David Wessel wrote in The Wall Street Journal. "So Republicans either oppose them, and look hypocritical, or back him: a win-win for Democrats."
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."
That's like giving firms a zero-interest loan to invest in equipment, Gregory Mankiw, a Harvard University economist who advised George W. Bush, told The Wall Street Journal. "But, [with] interest rates near zero anyway, the value of the loan is not that great."
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.
Every president since Bill Clinton has backed a permanent extension of the research tax credit, but Congress has established a pattern of extending it only temporarily because of its high cost.
"A permanent R&D credit is long overdue," U.S. Rep. Dave Camp, R-MI., the top Republican on the House Ways and Means Committee, said in a statement. "Full expensing is a serious proposal Congress should consider."
The infrastructure program will focus on modernizing transportation systems and creating jobs starting in 2011.
At a gathering of union members on the Labor Day holiday in Milwaukee, Obama announced plans for an "infrastructure bank" to fund repairs and rebuild 150,000 miles of roads, build 4,000 miles of new railways and repair 150 miles of airport runways.
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.
Politics Will Delay Action Until 2011
The White House has found cheerleaders among top Democrats in Congress and unions who enthusiastically support the $50 billion in infrastructure spending.
"As the recovery slows, we desperately need decisive action for our leaders on both fiscal and monetary policy," Richard Trumka, president of the AFL-CIO told CNNMoney.com on Tuesday. "It's time for leaders to show that they're economic patriots."
But several Republicans and business groups are not embracing the proposed $200 billion worth of corporate tax breaks because they don't like how the administration proposes to pay for the new spending: by eliminating tax deductions for oil and gas companies.
Even more pressing, two key Senate Democrats, whose votes would be crucial to the passage of any jobs bill, say the higher taxes concern them too.
U.S. Sen. Mary Landrieu, D-LA, said she is skeptical of paying for "otherwise beneficial proposals" by raising taxes on the oil and gas industry.
"While these tax increases may be politically popular in some areas of the country, they have a disproportionately negative effect on working families in the Gulf Coast where much of the industry is located," Landrieu spokesman Aaron Saunders said in a statement. "Sen. Landrieu fully supports getting America's economy back on track but feels that it should not be done at the expense of the Gulf Coast."
The White House will need to come up with a new way to pay for the jobs package if it wants support from moderate Republicans like Sen. Chuck Grassley, R-Iowa. They'll need at least one Republican vote to break through the all-too-common filibusters in the Senate.
"Business investment incentives sound fine, but will they be paid for in a way that hurts job creation?" Grassley asked. "If the offsets for this new package are other tax increases, then it's a non-starter."
But the hard facts of job creation are that unemployment, which ticked up to 9.6% in August, doesn't typically shrink from quick fixes.
For example, unemployment climbed above 9% in March 1982 – and stayed there for 19 months. Today's rate has hovered above 9% for 16 months. Even worse, while unemployment fell below 9% in October 1983, it stayed above 7% from May 1980 until January 1986.
It's therefore likely that unemployment will be a sore point for several more election campaigns, no matter what level of rhetoric arises during this one.
News & Related Story Links:
- Washington Post:
Obama transportation plan likely to have to wait - Wall Street Journal:
Obamanomics Is Recast as 'Recovery Summer' Fades - Bloomberg:
Obama Business Deduction Invites Gaming, Experts Say - Mckinsey Institute:
The right way to invest in infrastructure - CNNMoney.com:
Obama's jobs pitch fails to dazzle Washington - Money Morning:
Obama Floats $350 Billion Stimulus Package to Re-Ignite Economy
No matter how much you spend on infrastructure and job creation,the wages earned will mostly be spent on foreign goods….That money keeps leaving the country…This means the government must continue to go into debt to provide jobs…..Until the price of a product made in the USA is equal to or below the price of goods made in Asia we lose jobs…..America has been on a borrowing binge for the past 15 years to overcome lost jobs and low wages…Globalization and outsourcing are destroying our country…..We cannot compete with underpriced Asian labor and and an underpriced yuan…. We either have to… Read more »
But how would you change it? for one, low labor cost is temporary, it will disappear quickly if left alone. You must have noticed recan jump in chinese salaries by 40% or more. Most people don't even remember '60s and '70s, when Japan was pushing shody under priced goods in here, and was a synonym of poor quality. But you surely can't claim Japan has cheap labor anymore. As far as people buying imported goods, it's their choice, you can't force anyone to buy what you want them to buy. And you only need to take basic economics in high… Read more »
More than anything we need to get rid of the current tax system and go to some form of a flat tax. Our current tax code is the basis for overreaching by a federal government run AMUCK! Without it, most of the power Congress has to micromanage OUR LIVES would end. It would end our lobbying system which is nothing but CRIMINAL BRIBERY because most of lobbying has to do with attempts by groups to have Congress pass tax legiislation to benefit (or not hurt) them. Let's go to a tax system that can be put on a postcard –… Read more »
And what do you think chances are you are going to remove POWER from Congress, anytime soon?
Maybe we could establish a Federal Reserve Bank that refuses to be audited? Maybe they could print more $ than anyone will ever know about? To make us look wealthy when we're broke? Perhaps the Fed could give back door freebie loans to big US banks so they could buy our govt debt that nobody else will fund? Bankers incest, er instincts to the rescue? Then we could elect a guy who wrote a book about how great he was in his 30's, er President? Maybe he could hijack, er propose that taxpayers spend untold Trillions in back room deals… Read more »
I presume you're meaning the tragic twins in the Bush Cheney Administration.
As Jim Rickards says, "When you hear the word 'stimulus,' just substitute the word debt." As if taking on more debt to spend on politicians' pet projects will do the country any good, especially given that the multiplier effect on GDP for borrowed money spent is less than 1. Best estimates are .6. So, for every dollar spent, the economy gets 60 cents worth of benefit. Only a cynical politician could love that deal. The following comment is in reference to Mr. Miller's last article that re: JP Morgan tinkering with their prop trading desk to "comply with the Volcker… Read more »
As Jim Rickards says, "When you hear the word 'stimulus,' just substitute the word debt.
As if taking on more debt will do the country any good, especially when the multiplier effect on the GDP is less than 1. Best estimates are .6…so, for every borrowed dollar spet, the economy benefits to the tune of 60 cents. Only a cynical politician or an Keynesian "economist" could love that.
Well, previous comments have identified some symptoms of the economic problems this country has. They seem, coincidentally, to ignore the Bush years that turned our economy upside down, turned-over government to big business/financial groups; and drained our youth with military casualties, our world reputation with an unjust (and extremely costly) war; and lined the pockets of the oil nations and his energy buddies (Enron/Exxon/Etc). AND NOW, because Obama has not been able to correct that BUSH legacy of failure in a year and a half, we see all this parroting of LIMBO's idiocy to sarcastically discredit the guy who is… Read more »
If only government can get an economy moving, why did China need American investors? Why has Cuba never been able to support it's people? Why did the Soviet Union go broke? Governments are only groups of people, made up of people who went to a government position to get a job, not create them. WE are the government, through elections, we appoint people to act for us. So far this year those appointed have lost millions of jobs and not created any. and spent a trillion dollars. Out of that trillion how much did you get? Who do you know… Read more »
Les writes: We either have to go back to a tariff system or go broke…It seems we are choosing the latter….LD
I think that's the bottom line with which most people would agree. The problem of course, goes to the billions of dollars in bonuses that depend on cheap schlock made in poor countries. As long as the billion dollar powers can use their money to influence elections, as the Supreme Court recently ruled, we are doomed.
Your correct insight will be drowned in a self-indulgent propaganda tsunami.
Why doesn't the Obama adminstration simply double the standard deduction and eliminate the capital gains tax…and then eliminate the so-called AOP stablished by IRC Sections 851 and 855 while also placing all entitlement programs, and I do mean all entitlement programs, on hold until 12/31/2012.
At least food for thought, is it not?
Respectfully submitted,
Thomas Avery Blair, EA
If Obama wanted to save the economy, he could have given every family $25000 to pay on their home loans or a down payment on a home. The banks that were in trouble would have been overflowing in cash, the derivative market would have been covered because the loans being insured would have been paid back and there would have been no recession. No one would have lost their job and no one would have lost a home. He chose to borrow money from the banks to give it back to the banks to loan to you again. Then to… Read more »
Generosity breeds laziness. Had the money gone to the people in a few years they would have been lining up for more. As for the banks getting it thats even worse. However there are a lot of people out there who have been responsible borrowers due to irresponsible lending and borrowing they are now tarnished with the same brush. I know people that have 100% equity and several properties that are finding it difficult to get money from banks to expand. Why? Probably because the banks believe times and property prices are going to get a lot worse and banks… Read more »
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Stimulous is not equal to debt, re Economics 101… Where are some people's heads? All but the Federal government must operate on an administrative budget footing-read balanced budget. The Fed does not, and certainly should not at this time of anemic recovery from the Great Recession, need to do that in the short run. That does not mean they should not run surpluses in the future like they did in the 90's,, but that is not there focus now. There primary responsibility now is to run the federal budget such that we maximize the chance that every body else will… Read more »