10/21/10 7:54 PMObamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands

Page 1 of 8http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html

Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchSeptember 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 Obamaadministration was going to do five things:

1. Pass the biggest piece of expansionary fiscal policy it could do quickly--a pseudo-Republican one with a lot of (likely to be relatively ineffective) tax cuts in order tofreeze delay and opposition.

2. Conduct stress tests on the banks--and then either trumpet the results if it lookedlike they were healthy or inject public capital or force them to raise private capitalif it looked like they weren't.

3. Lay down a marker--"no 1937s"--and get commitments that if the recovery did notcome like a V by the end of the year that the congress would cooperate in doingmore to right the economy.

4. Induce the Federal Reserve to engage in a lot more quantitative easing--to take itsbalance sheet from $2 trillion up to $3 trillion or $4 trillion and see whether thatshrunk risk and duration premiums appreciably.

5. Have the Treasury increase the size of its balance sheet--leverage the TARP moneyto transform $1 trillion or more of risky assets that the private sector did not wantto 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 conventionalwisdom I hear is that it is the fault of Rahm Emmanuel--that he misled the Czar intosaying that the message should be "we have shown our strength and gotten congress topass the recovery policies that we wanted"--and that it is not the Czar's fault. But thereal story has to be more complex than that. My suspicion is that the economic team

Dashboard Blog Stats Edit Post

10/21/10 7:54 PMObamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands

Page 2 of 8http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html

presented not a 20% percentile but a 50% percentile, that Barack Obama believes inhis bones that he is lucky, and so the policies adopted were not the prudent policiesappropriate for a 20% percentile scenario but for an 80% percentile scenario.

David Wessel has more:

Obamanomics Is Recast as 'Recovery Summer' Fades: After the "RecoverySummer" that wasn't and strong signs voters think he is doing a lousy job with theeconomy, President Barack Obama is trying again. In a flurry of proposals rolledout for maximum attention, the president is re-emphasizing his eagerness tospend more on "roads, rail and runways" infrastructure, pressing to expand andmake permanent the research and experimentation tax credit popular with bigbusinesses and—in a surprise— proposing to let businesses write off an eye-popping 100% of investment spending through 2011. In a speech in Cleveland onWednesday, the president was expected to push this "invest in America" agendaand try to persuade middle-class voters that it'll help them. He knows Congress isunlikely to enact any of this in the few weeks left, but wants to give Democratssomething to campaign on (besides raising taxes on the rich) and show he has theoutlines 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 WhiteHouse 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 long-run productivity a boost, but are front-loaded to help the struggling economy inthe near-term as well. They are designed to be sold to those who want moreKeynesian stimulus and those who think Mr. Obama's first attempt at thatflopped.

The clever new entry is a huge (twice the size of the one in the initial Obamastimulus) temporary investment tax break that would get some businesses—howmany is far from clear—off the sidelines by cutting the cost of making newinvestments if they act before the end of 2011. "Tax cuts for business investmentmay be more effective in boosting short-term demand if they are temporary thanif they are permanent," the Congressional Budget Office has said. "Firms may viewthem as one-time opportunities for tax savings, which may induce firms to moveup some...future investment plans to the present." Gregory Mankiw, a HarvardUniversity economist who advised George W. Bush, likens this to giving firms azero-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 doingwhat they would have done otherwise. It's also so generous that it could inducesome companies to make investments to take advantage of the tax benefits butthat make little business sense. In contrast to other tax breaks, it has oneappealing feature: Firms pay less in taxes now but more later so the long-rundeficit impact is reduced.

Missing from the new Obama wish list is expanding the current payroll tax holidayto encourage employers to hire. That notion has fans inside the administration,but was left out—partly because of skepticism from some deficit-fearingcongressional Democrats about the near-term political benefits of souping up anexisting payroll-tax break The idea is sure to return if the job market remains

10/21/10 7:54 PMObamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands

Page 3 of 8http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html

weak; the president clearly isn't ruling it out.

The politics of the Obama initiatives are delicious. The president has changed theconversation from whether to renew or terminate President Bush's tax cuts to hisown tax-cut agenda, and is promoting a couple of business-friendly proposals thatRepublicans have previously promoted. So Republicans either oppose them, andlook hypocritical, or back him: a win-win for Democrats. The top Republican onthe House Ways and Means Committee, Dave Camp of Michigan, illustrated theRepublican dilemma Tuesday. "A permanent R&D credit is long overdue," he saidin 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 governmentshould "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," respondentssplit 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 wasample warning earlier this year that economic recovery lacked vigor and that theoomph of fiscal stimulus was about to wane. Had these policies been proposed inthe spring, Congress might have adopted them—and the economy would havebeen feeling the lift by now. Instead, the president looks like he checked "theeconomy" 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: FiscalPolicy, Economics: Macro, Obama Administration, Politics | Permalink

Reblog (0) |

Favorite

| Digg This | Save todel.icio.us | Tweet This!

TrackBack

TrackBack URL for this entry:http://www.typepad.com/services/trackback/6a00e551f0800388340133f3fd2626970bListed below are links to weblogs that reference Obamanomics Is Recast as 'Recovery Summer'Fades - WSJ.com:

Comments

Neal said...(quote)

Sustainable Tax PolicyBy Axel G MerkCreated 7 Sep 2010Submitted by Axel G Merk [1] on Tue, 7 Sep 2010Expensing Investments

10/21/10 7:54 PMObamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands

Page 4 of 8http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html

In what the Wall Street Journal hails as “one of his most dramatic gestures tobusiness,” President Obama is proposing companies be allowed to write off 100% oftheir new investment in plant and equipment through 2011. Democrats are lukewarmto 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 maybe the single most effective policy tool available to promote sustainable economicgrowth.

In what the Wall Street Journal hails as “one of his most dramatic gestures tobusiness,” President Obama is proposing companies be allowed to write off 100% oftheir new investment in plant and equipment through 2011. Democrats are lukewarmto 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 maybe the single most effective policy tool available to promote sustainable economicgrowth.

Setting politics aside, let’s look at the concept. For illustrative purposes, assume youhave an additional $1,000 income from your small business that would be taxed at35% unless you can offset the revenue with expenses. You would love to buy this gizmomachine that costs $1,000. Trouble is, you would be out of $1,000, yet may still needto pay Uncle Sam because your purchase is an investment, not an expense. Assume thegizmo 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, youwill owe Uncle Same more than the cash you have available. While tax rules arecomplex and a number of items can be expensed right away, many businesses, small orlarge, need to depreciate investments over many years: computers 5 years; forfurniture it’s typically 7 years.

As a result, businesses have an incentive to spend money on services that can beexpensed right away, but to postpone capital investments. Did you ever wonder whyyour landlord (assuming you are renting) is reluctant to upgrade the leaking roof inyour house? The IRS requires a depreciation period of 27.5 years for residentialimprovements. Commercial improvements require a 39-year depreciation period.

The main argument for requiring long depreciation periods is that one gets many yearsof use out of capital investments. That may well be the case, but the profitable usewould also yield tax revenue down the road. That’s part of the challenge: politicianslike 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 turnresults from profitable investment.

10/21/10 7:54 PMObamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands

Page 5 of 8http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html

Investing in plant and equipment also creates jobs as someone needs to manufactureand operate whatever it is that is built. If taxes did not discourage investment, more ofthat manufacturing would be done in the U.S. rather than overseas. Asia has a lowercost base to manufacture many things; but tax policies in place act as a booster todismantle manufacturing in the U.S., to ship jobs overseas.

Some argue allowing equipment to be expensed may not lead to the purchase of a newcomputer, but only to upgrade and consolidate old equipment, thus not creating newjobs. It is correct that an investment incentive will take longer to work its way throughthe economy than a cash-for-clunkers program or other schemes.

But investment tax incentives provide for long-term sustainable growth. The problemwith 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 withoutserious 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 thecourage and leadership to embrace it.

In our assessment, the U.S. dollar would also benefit medium term if policiesencouraged saving and investment rather than consumption at any cost.

(end quote)

Reply September 08, 2010 at 09:37 AMbakho said...Don't blame Rahm. Blame Obama. Obama is no FDR and is uncomfortable with NewDeal job creation programs. We are getting Obamanomics and it is Reaganomics redux.Obama was always DLC. Has ties to conservative financial types who bankrolled hiscampaign.

Reply September 08, 2010 at 11:09 AMOmega Centauri said...There can be two reasons a corporation may want to make capital investments. Theobvious one, is to be able to increase production to meet projected future demand. Thesecond one is to increase the efficiency of their current/planned production, especiallyto reduce their demand for fuel/power. Obviously the first type of investment ishampered by expectations of poor future demand. The second type of investmentdoesn't require future demand growth to produce a return. We should be thinkingabout how we can incentivize this second sort of investment. Also to the extent thatinvestments of the second kind are also incremental steps towards meeting futureenergy and climate goals there are positive externalities beyond the shorttermeconomic effects.

Roads, rail, and runways, uggh! As one who believes we are near peak oil, and allthings that require cheap oil to run are going to contract, these are a horriblemisallocation of resources. I am even convinced that rail is only good for carryingfreight, not people, but most public rail investment is directed towards passengers -and particularly the very resource intensive high speed variety. Cannot we directstimulus towards the infrastructure we are going to need for the future, not justbuilding (or rebuilding) twentieth century infrastructure?

10/21/10 7:54 PMObamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands

Page 6 of 8http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html

Me: Economists:

PaulKrugmanMark ThomaCowen andTabarrokChinn andHamiltonBrad Setser

Juicebox

Mafia:

Ezra KleinMatthewYglesiasSpencerAckermanDanaGoldsteinDanFroomkin

Moral

Philosophers:

Hilzoy andFriendsCrookedTimber ofHumanityMarkKleiman andFriendsEricRauchwayand FriendsJohn Holboand Friends

Reply September 08, 2010 at 11:54 AMComments on this post are closed.

Economics Is not a Morality PlayNew York Times (blog) - Sep 28, 2010Brad DeLong catches someone wondering if I am actually advocating war as asolution to our problems. Against stupidity, the gods themselves … ...Related Articles » « Previous Next »

economics DeLong

10/21/10 7:54 PMObamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands

Page 7 of 8http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html

10/21/10 7:54 PMObamanomics Is Recast as 'Recovery Summer' Fades - WSJ.com - Grasping Reality with Both Hands

Page 8 of 8http://delong.typepad.com/sdj/2010/09/obamanomics-is-recast-as-recovery-summer-fades-wsjcom.html