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:
- 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 to freeze delay and opposition.
- 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.
- 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.
- 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.
- 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 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 eye-popping 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 long-run 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 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.