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.

Missing Trees for Forest in Auto Maker Bailout

For the past week, the heads of the three largest auto makers in the United States have made their way to and from the halls of the United States Congress desperately seeking a financial aid package to help bail them out of their financial woes. Critics of the bailout argue that bailouts are wasteful and rarely do more than prolong the inevitable collapse. Supporters argue that, despite the repugnance of providing a bailout to yet another sector of the U.S. economy, a bailout is preferable to a collapse of the auto industry.

Clearly, both sides have it wrong in this issue, at least as far as the bottom line is concerned.

Those arguing in favor of a bailout--led by House Speaker Nancy Pelosi (D, CA), Senator Carl Levin (D, CA), and some venerable Republican members of Congress--argue that failing to provide a bailout will result in massive unemployment, not only in the automobile production business, but also in related fields, most notably among businesses that provide parts to the big three.

After listening to the appeals of the CEOs of the big three auto makers, Pelosi and Senate Majority leader Harry Reid (D, Nev.) rebuffed calls for immediate legislative injection of liquidity into the auto industry, opting, instead, to draft a list of conditions that the big three must first meet before Congress will entertain such overtures. Those conditions, though not yet public, are said to focus on CEO pay and bonuses, government interest on loans, government oversight of the industry, and a requirement that the big three jointly and individually draw up plans for righting their businesses.

Opponents of the bailout argue that now is the wrong time to provide assistance for an industry that began showing signs of wreckage many years ago and that has steadfastly refused to adapt to a changing environment in which higher gas mileage and alternative fuel-sourced cars are both more sensible and in greater demand. These opponents largely argue that the big three failed while others, most notably Honda and Toyota, forged ahead, allowing them to remain viable in the new world order.

Proponents of the bailout thus contend that, given the likely harm to workers, a bailout probably is inevitable, but that the terms ought to be favorable to the party providing the bailout. Opponents, meanwhile, generally argue that Congress ought to take a pass on the opportunity to bailout a failing industry, allowing the wheat to fall from the chaff.

While the two primary sides to the bailout debate offer sensible points in support of what appear to be their final positions on the matter, neither side is both looking at the practical problems suggested by the big three failings and addressing those problems.

Contrary to what opponents of a bailout suggest, a failure of the big three is more than a mere market correction. Tens of thousands of jobs will be imperiled by the collapse of the big three with the majority of those losing their jobs going first to the unemployment line and the public dole and then who knows where when the benefits run out. While Darwinians might have little sympathy for those trained in nothing other than riveting auto panels to an auto's frame, they ought at least to have some concern for what becomes of tens of thousands of people who have no job and no legal source of income. Clearly, outright opponents of a bailout of the big three have some things to consider before making their absolute statements against the bailout.

Similarly, proponents of the bailout of the big three have questions that they ought to be asking of their own position. For, as they took turns deriding the CEOs of the three auto makers for flying corporate jets to Washington, they failed to recognize the primary issue is not whether the big three survive, but how those whose livelihoods are attached to the success of the big three will make do should the big three go under.

What members of Congress ought to be discussing right now is not how to save the big three, but how to ensure that if and when any or all of the big three succumb to their own shortsightedness and greed, those who depend on the big three for their livelihoods do not go down with the ship.

How does that happen? That part is actually fairly simple and, though expensive, no more expensive than what the big three is now proposing as a bailout, with future pleas certainly in the offing.

The answer is that, rather than provide the big three with bailout money, Congress ought to put money into an interest bearing trust to invest in the aftermath of a possible collapse of the U.S. auto industry. The funds from the trust will be used to ensure that non-executives, who rely on the big three for an existing pension plan and health plan, retain those benefits if and when their company ceases to cover those benefits. The trust also will be used to extend unemployment benefits for workers laid off of work as a result of the downsizing or bankruptcy of any of the big three, with the condition that workers of non-retirement age obtain retraining in a viable field.

The solution is not a perfect one as, more likely than not, it will include considerable waste and bureaucracy. But it is far preferable to simply doling out money to an industry that has been sinking for some time with the objective of propping up companies rather than focusing on the harms that would result were the companies to fail. This is particularly true when one considers the outsourcing that has become the hallmark of the big three.

The guess here is that Congress is neither far-sighted nor brave enough to allow the big three to fail while saving only those left in the wake.