Economists are already questioning the impact of the latest economic stimulus plan, which appears to be little more than a transparent plea for votes.
President Barack Obama heads to Cleveland, Ohio today to unveil more measures aimed to jolt the country out of a frustratingly slow economic recovery ahead of the November mid-term elections. In an effort to create jobs, the administration’s proposal includes a $50 billion infrastructure spending plan and a tax write-off for businesses that invest in new equipment.
Surely a second stimulus (let’s just call it what it is) is needed as the unemployment rate continues to hover around 9.6%. Obama’s proposal to direct new spending toward investments makes economic sense. In theory, building and rebuilding roads and other infrastructure spurs demand for asphalt, steel and other materials, which in turn leads to new jobs. A similar domino effect could arise when businesses ramp up orders on computers and other equipment, prompting expansion that eventually leads to more hiring.
But Obama’s proposal doesn’t go far enough. And as the president delivers his Cleveland stump speech, it’s tough not to wonder if there is really a point to his middle-America tour beyond the transparent plea for votes.
The president probably won’t score political points with lawmakers. More than half of Americans think that additional spending is needed to create jobs and stimulate the economy, according to a June Gallup poll. But Obama’s pitch is unlikely to pass Congressional approval at a time when many — even Democrats — worry about trillion-dollar deficits. What’s more, Republicans, poised to take over the House and possibly the Senate come November, are already blasting the plan.
Fool me twice, shame on me
Obama is unlikely to score points with voters, either. It’s true the president was probably careful not to alarm debt-conscious lawmakers when he put together this second stimulus, but the scope of his infrastructure plan appears much too small to really turn things around anytime soon, let alone in time for election day, some economists say.
The first $862 billion stimulus package already devoted funding for repairing and rebuilding roads, but overall, spending was directed more toward unemployment benefits and filling state and local budget gaps, says Don Dutkowsky, economics professor at Syracuse University’s Maxwell School of Citizenship and Public Affairs. Dutkowsky adds he is encouraged by Obama’s infrastructure plan, but the scale needs to be much bigger for the unemployment rate to fall to the pre-recession 5% to 6%. It’s hard to say at this point how big the package should be, but economists have argued that Obama’s initial stimulus should been $1.2 trillion to $1.3 trillion — the higher end of what Obama had proposed for the first round of stimulus funding.
“I won’t take that argument all the way and advocate a $500 billion spending plan,” Dutkowsky says. “But especially in that context, $50 billion looks more like a decent fraction than the sufficient amount.”
Obama’s proposal would build 150,000 miles of roads and 4,000 miles of rail over the next six years. He also wants to rehabilitate and reconstruct 150 miles of runway, as well as create an Infrastructure Bank to streamline the flow of complex national and regional infrastructure projects — ideas trumpeted by some of the most notable economists, including Columbia University Professor Jeffrey Sachs who believes there hasn’t been enough attention paid to investment spending. Even Sachs foresees a plan much bigger and more long-term than what Obama is proposing. Among other things, Sachs also supports boosting infrastructure exports to Africa and other low-income countries – something China is already extensively doing.
And as far as Obama’s proposal to allow companies to deduct from their taxes the full value on purchases of new equipment through 2011, it remains to be seen if this would be a big enough incentive to get businesses to invest more and hire more. Companies can already deduct these expenses, but the plan would allow them to make the deductions upfront. The idea is that executives would have more cash on hand to invest more.
If the tax break pans out anything like consumers’ response to Obama’s tax credit on home purchases, then that’s a bad sign, says Robert Salomon, professor at New York University’s business school. The tax credit supported home sales briefly. When it expired in April, sales of previously owned homes dipped in July to their slowest pace in 15 years.
Salomon supports more stimulus spending. He adds the tax credit holds promise, but it could act as a “misincentive,” merely giving tax relief to businesses who were going to buy new equipment anyway. The hope is that the incentive prompts businesses to buy things they otherwise might not have without the tax break.
Companies have been sitting on record amounts of cash, but the lack of demand has largely kept many from spending more. Salomon gives an even-handed analysis of Obama’s tax deduction, but it appears unlikely that executives would act the same as consumers.
So what good is Obama’s second stimulus? If anything, it’s either largely symbolic to show job creation is a top priority or a strategy to make Republicans appear they’re stalling economic recovery. Whatever the intention doesn’t really matter, especially to the millions still out of work.
