- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -

Obama Opts for Politics Over Jobs, The Times Joins In

Posted By J.D. Foster, Ph.D. On September 9, 2010 @ 1:00 pm In Economics | Comments Disabled

[1]

Today’s New York Times editorial [2] on President Obama’s Cleveland political diatribe-cum-economic speech got one point right — Obama “took too long to engage this debate.” The rest of the editorial was little more than an epilogue to Obama’s political speech.

One can see why the Times would avoid talking about the economic substance of the speech, the debate to which the president is so tardy: because there was precious little in the speech to talk about, despite an economy showing “widespread signs of a deceleration,” according to [3] the Federal Reserve’s authoritative Beige Book. As the Washington Post noted [4] in its coverage of the speech, “Even some vulnerable Democrats…quickly condemned the president’s latest proposal, suggesting it bears an uncomfortable resemblance to last year’s unpopular stimulus package.”

A quick look at the package quickly reveals its yawn factor. One “new” proposal is to spend another $50 billion on infrastructure. Fifty billion spread over six years in a $15 trillion economy. Not that a larger package would do any better, but as economic stimulus it leaves little wonder his proposal was only taken seriously by the construction unions [5].

Another proposal is to make the Research and Experimentation tax credit permanent. That’s great for the long-run, but keeping current policy doesn’t do much for stimulus.

Obama’s one major, new proposal is to allow all businesses to deduct their investment costs immediately (called “expensing”) rather than deduct these costs over time. The proposal would run through 2011. The idea is to reduce the disincentive to new investment and so spur an increase in business investment. This proposal is important because expensing is normally the province of conservatives. Obama’s proposal represents the first time a leading Democrat has acknowledged that current depreciation rules hamper economic growth.

Unfortunately, the proposal is likely to have a modest effect at best, in part due to circumstances and in part because Obama has again resorted to policy gimmickry. The problem with the basic proposal starts with the obvious excess capacity currently in place and likely to remain in place for a long time. Sure, some companies are relatively capacity constrained, but not many. So the effects are likely to be greatly muted relative to what we would see under normal economic circumstances.

Second, as Greg Mankiw [6] points out, interest rates are already incredibly low, so the general hurdle rate on investment is pretty low.

Third, the proposal’s expiration in 2012 morphs a fundamentally good idea into yet another policy gimmick while injecting a double dose of added uncertainty into the economic environment. If the economy picks up in 2011, people will ask how much of the pickup is simply due to temporary stimulus and how much of it is enduring. Then, in 2012, the economy would weaken again as whatever increase in investment occurs in 2011 reverses. Investment today is for production and profit tomorrow. If tomorrow faces a potentially weaker economy, do you invest more today? That’s a lot of uncertainty to wade through to take the gamble if you don’t need to.

While nothing Obama and Congress can do will improve the economy in the very near term — economies simply do not turn on a dime — they can act quickly to give the economy a needed boost in 2011. It all starts with abandoning the addiction to policy gimmicks and beginning to focus on fundamentals like spending restraint. But the first, most obvious step is to keep taxes from going up in 2011 as scheduled. Even Peter Orszag, Obama’s first OMB director, has called for extending the tax cuts for two years. A permanent extension would be much better, but two years is a good start not only at deflecting the tax hike but restoring some confidence in Obama’s willingness to ignore ideology for the good of the country.

Cross-Posted from NRO’s The Corner [7]


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/09/09/obama-opts-for-politics-over-jobs-the-times-joins-in/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/10-9-9-Barack-Obama1.jpg

[2] editorial: http://www.nytimes.com/2010/09/09/opinion/09thurs1.html?_r=3&ref=opinion

[3] according to: http://www.csmonitor.com/Business/new-economy/2010/0908/Beige-book-US-economy-grows-more-slowly

[4] noted: http://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090807415.html

[5] only taken seriously by the construction unions: http://www.heritage.org/Research/Reports/2010/09/Infrastructure-Stimulus-Spending-Pandering-to-Organized-Labor

[6] Greg Mankiw: http://gregmankiw.blogspot.com/

[7] Cross-Posted from NRO’s The Corner: http://www.nationalreview.com/corner/246072/obama-opts-politics-over-jobs-i-times-i-joins-j-d-foster

Copyright © 2011 The Heritage Foundation. All rights reserved.