Obama Stimulus More About Politics Than Jobs

By: Money_Morning

Don Miller writes: 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.

Source : http://moneymorning.com/2010/09/09/obama-stimulus-2/

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