Obamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands
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Grasping Reality with Both Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, RealityBased, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.
Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch September 08, 2010
Obamanomics Is Recast as 'Recovery Summer' Fades WSJ.com David Wessel writes about Barack Obama's economic plans. As I understood--or imagined I understood--things at the start of 2009, the Obama administration was going to do five things: 1. Pass the biggest piece of expansionary fiscal policy it could do quickly--a pseudoRepublican one with a lot of (likely to be relatively ineffective) tax cuts in order to freeze delay and opposition. 2. Conduct stress tests on the banks--and then either trumpet the results if it looked like they were healthy or inject public capital or force them to raise private capital if it looked like they weren't. 3. Lay down a marker--"no 1937s"--and get commitments that if the recovery did not come like a V by the end of the year that the congress would cooperate in doing more to right the economy. 4. Induce the Federal Reserve to engage in a lot more quantitative easing--to take its balance sheet from $2 trillion up to $3 trillion or $4 trillion and see whether that shrunk risk and duration premiums appreciably. 5. Have the Treasury increase the size of its balance sheet--leverage the TARP money to transform $1 trillion or more of risky assets that the private sector did not want to hold into safe assets that the private sector was so desperate to have. They did (1) and (2)... and somehow (3), (4), and (5) did not happen. The conventional wisdom I hear is that it is the fault of Rahm Emmanuel--that he misled the Czar into saying that the message should be "we have shown our strength and gotten congress to pass the recovery policies that we wanted"--and that it is not the Czar's fault. But the real story has to be more complex than that. My suspicion is that the economic team http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html
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Obamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands
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presented not a 20% percentile but a 50% percentile, that Barack Obama believes in his bones that he is lucky, and so the policies adopted were not the prudent policies appropriate for a 20% percentile scenario but for an 80% percentile scenario. David Wessel has more: Obamanomics Is Recast as 'Recovery Summer' Fades: After the "Recovery Summer" that wasn't and strong signs voters think he is doing a lousy job with the economy, President Barack Obama is trying again. In a flurry of proposals rolled out for maximum attention, the president is re-emphasizing his eagerness to spend more on "roads, rail and runways" infrastructure, pressing to expand and make permanent the research and experimentation tax credit popular with big businesses and—in a surprise— proposing to let businesses write off an eyepopping 100% of investment spending through 2011. In a speech in Cleveland on Wednesday, the president was expected to push this "invest in America" agenda and try to persuade middle-class voters that it'll help them. He knows Congress is unlikely to enact any of this in the few weeks left, but wants to give Democrats something to campaign on (besides raising taxes on the rich) and show he has the outlines of an economic game plan. Here's a look at the economics, politics and timing of Obamanomics Redux: The word "stimulus" will never again cross Mr. Obama's list. Instead, the White House lingo to describe these proposals is "pro growth with an upfront kick." That is, they are crafted to spur public and private investment and thus give longrun productivity a boost, but are front-loaded to help the struggling economy in the near-term as well. They are designed to be sold to those who want more Keynesian stimulus and those who think Mr. Obama's first attempt at that flopped. The clever new entry is a huge (twice the size of the one in the initial Obama stimulus) temporary investment tax break that would get some businesses—how many is far from clear—off the sidelines by cutting the cost of making new investments if they act before the end of 2011. "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 has said. "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." Gregory Mankiw, a Harvard University economist who advised George W. Bush, likens this to giving firms a zero-interest loan to invest in equipment, and he's a fan. "But," he adds, with "interest rates near zero anyway, the value of the loan is not that great." Of course, this tax break, like so many others, rewards some businesses for doing what they would have done otherwise. It's also so generous that it could induce some companies to make investments to take advantage of the tax benefits but that make little business sense. In contrast to other tax breaks, it has one appealing feature: Firms pay less in taxes now but more later so the long-run deficit impact is reduced. Missing from the new Obama wish list is expanding the current payroll tax holiday to encourage employers to hire. That notion has fans inside the administration, but was left out—partly because of skepticism from some deficit-fearing congressional Democrats about the near-term political benefits of souping up an existing payroll-tax break The idea is sure to return if the job market remains
http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html
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weak; the president clearly isn't ruling it out. The politics of the Obama initiatives are delicious. 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. So Republicans either oppose them, and look hypocritical, or back him: a win-win for Democrats. The top Republican on the House Ways and Means Committee, Dave Camp of Michigan, illustrated the Republican dilemma Tuesday. "A permanent R&D credit is long overdue," he said in a statement. "Full expensing is a serious proposal Congress should consider."... A new Wall Street Journal/NBC News poll found respondents disapprove of Mr. Obama's handling of the economy 56% to 39%. But asked if the government should "do more to solve problems and help meet the needs of people" or if it is "doing too many things better left to businesses and individuals," respondents split evenly. Democrats aren't likely to get many votes from the "doing too much" camp; they need all of the others. On both politics and economics, though, the president's moves are late. There was ample warning earlier this year that economic recovery lacked vigor and that the oomph of fiscal stimulus was about to wane. Had these policies been proposed in the spring, Congress might have adopted them—and the economy would have been feeling the lift by now. Instead, the president looks like he checked "the economy" off the to-do list prematurely, and instead turned to financial reform, energy, immigration and Middle East peace—and now regrets that. Brad DeLong on September 08, 2010 at 09:20 AM in Economics, Economics: Fiscal Policy, Economics: Macro, Obama Administration, Politics | Permalink Favorite
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Comments Neal said... (quote) Sustainable Tax Policy By Axel G Merk Created 7 Sep 2010 Submitted by Axel G Merk [1] on Tue, 7 Sep 2010 Expensing Investments http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html
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In what the Wall Street Journal hails as “one of his most dramatic gestures to business,” President Obama is proposing companies be allowed to write off 100% of their new investment in plant and equipment through 2011. Democrats are lukewarm to the idea as it doesn’t “stimulate demand”; Republicans are shooting down the idea, too. Few seem to realize is that allowing businesses to expense their investments may be the single most effective policy tool available to promote sustainable economic growth. In what the Wall Street Journal hails as “one of his most dramatic gestures to business,” President Obama is proposing companies be allowed to write off 100% of their new investment in plant and equipment through 2011. Democrats are lukewarm to the idea as it doesn’t “stimulate demand”; Republicans are shooting down the idea, too. Few seem to realize is that allowing businesses to expense their investments may be the single most effective policy tool available to promote sustainable economic growth. Setting politics aside, let’s look at the concept. For illustrative purposes, assume you have an additional $1,000 income from your small business that would be taxed at 35% unless you can offset the revenue with expenses. You would love to buy this gizmo machine that costs $1,000. Trouble is, you would be out of $1,000, yet may still need to pay Uncle Sam because your purchase is an investment, not an expense. Assume the gizmo machine is to be depreciated over 5 years: * $1,000 gizmo machine depreciated over 5 years: $200 depreciation this year * Taxable income: $1,000 income – $200 depreciation: $800 taxable income * Tax liability 35% of $800: $280 Cash flow: $1,000 income ($1,000) gizmo machine ($280) taxes ______ ($280) net You will be able to expense the investment over five years, but for the first year, you will owe Uncle Same more than the cash you have available. While tax rules are complex and a number of items can be expensed right away, many businesses, small or large, need to depreciate investments over many years: computers 5 years; for furniture it’s typically 7 years. As a result, businesses have an incentive to spend money on services that can be expensed right away, but to postpone capital investments. Did you ever wonder why your landlord (assuming you are renting) is reluctant to upgrade the leaking roof in your house? The IRS requires a depreciation period of 27.5 years for residential improvements. Commercial improvements require a 39-year depreciation period. The main argument for requiring long depreciation periods is that one gets many years of use out of capital investments. That may well be the case, but the profitable use would also yield tax revenue down the road. That’s part of the challenge: politicians like tax revenue now to finance their own spending programs. Politicians are looking for the “shot-in-the-arm” program to “stimulate demand”. Exhausted consumers don’t need more demand; they need to save more; saving in turn results from profitable investment. http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html
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Investing in plant and equipment also creates jobs as someone needs to manufacture and operate whatever it is that is built. If taxes did not discourage investment, more of that manufacturing would be done in the U.S. rather than overseas. Asia has a lower cost base to manufacture many things; but tax policies in place act as a booster to dismantle manufacturing in the U.S., to ship jobs overseas. Some argue allowing equipment to be expensed may not lead to the purchase of a new computer, but only to upgrade and consolidate old equipment, thus not creating new jobs. It is correct that an investment incentive will take longer to work its way through the economy than a cash-for-clunkers program or other schemes. But investment tax incentives provide for long-term sustainable growth. The problem with the proposal on the table is not the idea, but that * It should have come a long time ago; * It should be permanent, not a one-off idea for 2011; * Eight weeks before the election, it appears to be mostly a campaign ploy without serious commitment. Republicans should come up with their counter-proposal rather than shooting it down. “Investing in America� can be a campaign slogan for either party; politicians need the courage and leadership to embrace it. In our assessment, the U.S. dollar would also benefit medium term if policies encouraged saving and investment rather than consumption at any cost. (end quote) Reply September 08, 2010 at 09:37 AM bakho said... Don't blame Rahm. Blame Obama. Obama is no FDR and is uncomfortable with New Deal job creation programs. We are getting Obamanomics and it is Reaganomics redux. Obama was always DLC. Has ties to conservative financial types who bankrolled his campaign. Reply September 08, 2010 at 11:09 AM Omega Centauri said... There can be two reasons a corporation may want to make capital investments. The obvious one, is to be able to increase production to meet projected future demand. The second one is to increase the efficiency of their current/planned production, especially to reduce their demand for fuel/power. Obviously the first type of investment is hampered by expectations of poor future demand. The second type of investment doesn't require future demand growth to produce a return. We should be thinking about how we can incentivize this second sort of investment. Also to the extent that investments of the second kind are also incremental steps towards meeting future energy and climate goals there are positive externalities beyond the shortterm economic effects. Roads, rail, and runways, uggh! As one who believes we are near peak oil, and all things that require cheap oil to run are going to contract, these are a horrible misallocation of resources. I am even convinced that rail is only good for carrying freight, not people, but most public rail investment is directed towards passengers and particularly the very resource intensive high speed variety. Cannot we direct stimulus towards the infrastructure we are going to need for the future, not just building (or rebuilding) twentieth century infrastructure?
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Reply September 08, 2010 at 11:54 AM Comments on this post are closed.
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