Sunday, February 15, 2009

Obama's Stimulus Plan Worse Than Ailment

As the 2008 Presidential election approached, Americans were offered two choices for addressing the nation's mounting economic crisis. The first was that offered by Presidential candidate John McCain which called for more subsidies for Wall Street firms and banks and corporate tax cuts. The second, that offered by Barack Obama, called for more subsidies for Wall Street and banks, albeit with strings attached thereto, tax cuts for the middle class, and an infusion of cash, at the expense of future tax payers, to create jobs.

Americans decidedly elected the Obama prescription for responding to the economic crisis, viewing the McCain plan as too tied to trickle-down economics and the policies of the Bush Administration. The question now is not whether Americans selected the candidate with the right approach, but whether President Obama's approach is any better than McCain's. Upon initial review, the prospects are not encouraging.

McCain's plan clearly was a non-starter. Focused on giving more free money to Wall Street firms in the hope that they would know how best to spend it and pledging to cut only corporate taxes, McCain seemed to be responding to the pre-Reagan era more than to the current economic crisis that is being fueled not by high corporate taxes or the lack of money on Wall Street, but on the lack of credit for businesses and consumers, alike, mountinghealth care burdens on individuals and companies, and increasing tax burdens on individuals, from rich to poor, with less and less return on the tax dollar.

President Obama's initial stimulus bill--a nearly $800 billion deficit spending plan--was supposed to address the short-comings of the McCain proposal and the Bush Administration's corporate welfare policy. Instead, it has exacerbated the divide between Democrats and Republicans by fueling contentions that Democrats look to spend before assessing the non-political value of their spending. Worse yet, the Obama stimulus plan does little, if anything to stimulate the economy.

At the heart of President Obama's stimulus plan is a what Democrats charitably refer to as a "tax credit." In reality, the credit is actually a tax cut. And the difference is highly significant.

Unlike last year's rebates which had the Bush Administration sending hefty checks out to families in the hope that families would then spend the money and jump-start the economy, the Obama "credit" will be returned to working individuals in the form of a lower tax deduction on their paychecks. President Obama has touted the policy as one that will spur consumer spending by returning up to $400 to individual workers.

The problems with the Obama plan, are multi-fold, with the most glaring being that it does nothing to improve one of the underlying cuplrits of the current market malaise, the fact that consumers are not spending. Spread over the course of one year, the Obama "tax credit" provides a reduction in taxes to workers of a paltry $33 per month--before the additional income is hit by additional taxation. Few will look at the resulting gain as sufficient enough to warrant additional spending in a troubled economy, as most will simply bank the difference or use it to pay down debt.

Unlike the one-time Bush rebate, the Obama plan thus provides no meaningful hope for stimulating the economy. And it achieves this non-gain at the expense of the federal treasury.

The cost of Obama's tax credit? Approximately $120 billion, plus debt servicing.

Obama's stimulus plan also suffers from a lack of focus on creating jobs, opting, instead, to shore up long-established Democratic projects and supplementing unemployment benefits and medicaid. That makes the stimulus plan look more like what one would expect to find in a budget bill promoted by a Democratic Congress and Democratic White House rather than an emergency measure intended to address specific market ailments.

Of the nearly $800 billion in spending called for under the Obama Plan, arguably only $95 billion even remotely will go toward programs that will create any meaningful number of jobs, other than in the abstract or over the very long term.

While most Americans would prefer to see jobless Americans returning to work and, failing that, having some form of safety net that does not force them onto the streets, or worse, President Obama's stimulus plan does far more to address the symptoms of the current market problem than it does to remedy the cause of the problem.

Republicans offered an alternative to the Obama Plan that would have squarely addressed one of the fundamental problems of the current market without the excess spending provided under the Obama Plan. That proposal called for banks to set mortgage rates at 4%. How, precisely, banks would have been compelled to set rates was not divulged by advocates of the program, but, certainly, there are ways to compel such action, most notably by using the Fed Funds rate to manipulate activity.

Lowering mortgage rates to 4% would spur refinancing and encourage borrowing. That would spur housing star-ups and sales of housing and household products and serve as a strong catalyst to revitalizing the economy.

Opponents of this mortgage policy argue that the policy would only encourage consumer activities that led to the current mess, with consumers chasing financial dreams by taking out loans that they cannot afford to repay. The easy remedy, of course, is to require lenders to impose down-payment requirements requisite with the income levels of those seeking the loans. That undoubtedly would lead to the rejection of some loan applicants, but that's the price one must pay for maintaining a mortgage system that does not lead to the problems that the mortgage system circa 2008 led to.

And that's a price that President Obama currently appears unwilling to ask Americans to pay--willing or not.

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