Scattershot Stimulus


The scattershot nature of President Obama’s latest economic proposals is a sign that the administration is starting to panic — and panic it should: The GOP’s advantage in generic-ballot polling is approaching historic proportions. But the composition of the proposals also tells us something else: The administration knows it is losing its fight to let certain of the Bush tax cuts expire — even though it now has explicitly ruled out a compromise on extending them — and it is making one last push to buy leverage for its position by offering “targeted” tax cuts to the business community.

“Targeted” is one of this administration’s favorite words, second only to “inherited,” as in, “To address the severe crisis he inherited, President Obama pushed for a stimulus that was timely, targeted, and temporary.” But what we have learned from the stimulus is that Congress has exceptionally bad aim, and that temporary measures to boost the economy do little more than steal demand from the future. The Cash for Clunkers program boosted car sales for the two-month window of its existence, but it was followed by a steep drop a few months later: Average the two time periods together and you get no noticeable change in demand. The temporary Homebuyers Tax Credit had a similar effect on home sales, with transactions spiking the month before the credit expired and then plummeting in the months after.

Having spent the last 18 months binging on stimulus sugar and enduring the consequent crashes, Obama suggests we return to the cookie jar with a temporary credit that would allow businesses to take an immediate 100 percent deduction for new capital and equipment expenditures made between now and the end of 2011. (Under current law, businesses must spread the deduction out over seven years.) A permanent credit of this sort might make sense as an option for businesses, but a temporary credit is a bad idea. Just as Cash for Clunkers and the Homebuyers Tax Credit distorted demand for cars and homes without really stimulating it, a temporary deduction for capital expenditures would encourage firms that were already planning on building new plants or buying new equipment at some point to make those investments in 2011 rather than 2012, but it probably wouldn’t be enough to persuade them to invest in the absence of such plans.

Obama also proposes to expand and make permanent a tax credit for research-and-development expenditures. This would be an improvement over the status quo, under which this tax credit has been “temporary” for government accounting purposes but consistently reauthorized since its creation in 1981. By itself, the policy isn’t objectionable, but it’s being offered in exchange for a worse overall tax climate: The administration has almost certainly oversold the benefits of expanding the credit, which would be small compared to the costs of raising tax rates in a weak economy. Increasing tax rates on income, dividends, and capital gains, even if those hikes were confined to the top two brackets, would weaken incentives for some of the country’s most productive individuals and profitable small businesses to work, invest, hire, and grow. A slightly bigger write-off for R&D isn’t sufficient to cushion that blow, and business owners know it. 

No list of proposals from this president would be complete without new spending, so the president has also asked for $50 billion to fund a new “infrastructure bank” that would make loans for transportation projects. It’s important to keep in mind that the government can’t pay for the transportation projects it already has. The Highway Trust Fund is insolvent, and the Democrats aren’t willing to raise the gas tax that funds it, even though they’ve tried every other way they can think of to make fossil fuels more expensive.

It isn’t clear where the administration would get the money to fund the government’s share in this new bank, though its spokesmen have suggested, as they have with regard to every other new spending request, that raising taxes on oil-and-gas companies and “closing loopholes” might cover part of the cost. Nor is it clear how the bank would attract private capital. Toll roads and other revenue-generating projects might be attractive to investors, but these kinds of projects aren’t exactly political winners. The worst-case scenario, which we can easily imagine, would involve giving private investors an incentive to bring their money to the table by insuring them against losses and letting them keep most of the profits while making taxpayers shoulder all of the risk. Haven’t we seen this movie before? Remind us: How did it end?   

If this summer’s employment and housing numbers heralded the death of the latest Keynesian revival, then Obama’s latest raft of stimulus proposals indicates that he has reached the bargaining stage of grief. He is tacitly acknowledging that tax relief is the best medicine for an ailing economy, but he is trying to hold on to the idea that government still knows best where that relief should be “targeted,” and he’s asking for just $50 billion more in new spending in exchange. He still thinks we should let the Bush tax cuts expire, even as key senators in his party and his own former OMB director have abandoned that view. The sooner Obama gets over the denial stage, reaches the acceptance stage, and embraces a pro-growth tax policy, the sooner we’ll exit the depression stage and get on the road to recovery. 


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