GS Skinny: The Administration’s New Fiscal Proposals

The President’s proposal is now looking anemic at best.

Like I think Woody Allen once said, the food was bad and the portions were small.

This will cost the Dems even more seats in November.

Fortunately the federal deficit is already large enough to support a bit of modest growth.

All looking very L shaped to me, with a hint of growth.

Gasoline consumption has recovered and showing signs of growth year over year, but very modest.

Modest recoveries from the lows and leveling off.

Continued modest improvement from the lows

Manufacturing, the smaller component of GDP, led from very low levels

Looking very L shaped.

These are March numbers, June should be out soon and show further balance sheet repair as deficit spending continues are relatively high levels, adding income and net financial assets to the non govt. sectors.

Lots of signs of leveling off at modest levels of top line growth.

Waiting for the handoff to private sector credit expansion as balance sheets repair, or another fiscal adjustment.

GS Skinny: The Administration’s New Fiscal Proposals
(CLEARED FOR EXTERNAL USE)

September 7, 2010

The White House has announced three new measures to stimulate growth: 100% up-front depreciation of capital investments; a permanent and slightly expanded R&D tax credit; and $50 bn in infrastructure spending. They could be helpful but are unlikely to have a large effect on growth for four reasons: (1) some of them cover multiple years, spreading out the fiscal impulse; (2) the incremental effect is smaller than the headline numbers imply, as some are modifications of existing proposals or policies and one is essentially an interest free loan; (3) the president proposes offsetting the cost of some of the proposals with targeted corporate tax increases of an equal amount; and (4) the likelihood of enactment of some of these proposals is low.

Key points:

1. Bonus depreciation. The president proposes to allow companies to deduct 100% of the cost of capital investments (not including real estate) made in 2010 and 2011. Press reports cite White House estimates that the proposal would lower corporate tax receipts by $200bn. However, almost all of this revenue loss would be temporary, since the additional deductions taken now would lower deductions in future years, effectively making this an interest free loan. Given current low levels of capacity utilization, the benefit of additional investment is low to begin with. Our previous analysis indicated that the 50% bonus depreciation provision effective for 2008 and 2009 had a relatively small effect on investment. To the extent it does have an effect, it is likely to pull forward demand into the quarter just before expiration (in this case Q4 2011) so the near term effect should be even more modest (and indeed the effect in early 2012 would be negative). Whatever effect the provision would have would also be weakened somewhat by the proposal to raise corporate tax revenues (through closing of “loopholes”) to offset the proposal’s cost.

2. R&D Tax credit. The president is expected to propose to increase and make permanent the research and development tax credit, at a cost of $100bn over ten years. This proposal is somewhat less than meets the eye, since the president has already proposed to make the credit permanent at a cost of $80bn. This leaves an incremental proposal worth around $20bn, or $2bn per year. Nevertheless, enactment of this proposal would be helpful on the margin, since the existing R&D credit lapsed at the end of last year and has yet to be renewed by Congress.

3. Infrastructure. The president proposes to spend $50bn on transportation infrastructure projects, as part of a six-year plan. We take this to mean a front-loading or incremental investment on top of the six-year reauthorization of surface transportation spending programs that has been pending in Congress for most of the year. For context, a $50bn addition to infrastructure spending is roughly on par with the investments made in that sector in the 2009 Recovery Act. If enacted, this could provide an important boost to growth, particularly in 2011. However, the likelihood of enactment in the near term appears low. Also, offsetting the otherwise positive effect is the proposal to offset the entire cost with the repeal of tax incentives for oil and gas companies.

4. Process from here. There are two likely scenarios for consideration of the tax-based measures. First, the Senate will vote on small business legislation next week, which already includes a 50% depreciation bonus for 2010. This provision could simply be modified, to bring it into line with the president’s depreciation proposal, in which case it could be enacted in the next few weeks. The second scenario is that the tax measures could be added to upcoming legislation to extend the expiring 2001/2003 tax cuts, which will be debated in late September. Adding corporate tax cuts to that legislation might allow Democratic leaders to attract enough votes for passage without extending the upper-income tax rates that most Republicans support. However, given that legislation’s uncertain prospects, adding these measures to it could also risk delaying enactment until after the November election. Infrastructure spending would be dealt with separately from the tax measures; the most likely scenario is that it could be considered after the election as part of the next stop-gap extension of the highway program, which expires December 31.

1938 in 2010

1938 in 2010

By Paul Krugman

September 5 (Bloomberg) — Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.

The president in question is Franklin Delano Roosevelt; the year is 1938. Within a few years, of course, the Great Depression was over. But it’s both instructive and discouraging to look at the state of America circa 1938 — instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.

Now, we weren’t supposed to find ourselves replaying the late 1930s. President Obama’s economists promised not to repeat the mistakes of 1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out.

And just as some of us feared, the inadequacy of the administration’s initial economic plan has landed it — and the nation — in a political trap. More stimulus is desperately needed, but in the public’s eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs.

In short, welcome to 1938.

The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong conclusions from the recession that followed: far from calling for a resumption of New Deal programs, voters lost faith in fiscal expansion.

Consider Gallup polling from March 1938. Asked whether government spending should be increased to fight the slump, 63 percent of those polled said no. Asked whether it would be better to increase spending or to cut business taxes, only 15 percent favored spending; 63 percent favored tax cuts. And the 1938 election was a disaster for the Democrats, who lost 70 seats in the House and seven in the Senate.

Most interesting!

Then came the war.

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

Agreed! The deficit per se was of no consequence. The risks were and remain inflation from excess demand, which is not an easy channel to use to generate what we call inflation in today’s world. Our CPI problems have tended to come in through the cost channel and propagated by govt indexation of one form or another.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity.

Agreed. Though the way I say it, for a given size govt. and given set of credit conditions there is a level of taxes that coincides with full employment, and that level is generally well below the level of govt spending.

Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

What??? Here, sadly, Paul’s implication that the actual level of the govt debt per se matters, and that his bent that lower deficits are somehow ‘better’ shines through, keeping him in the camp of being part of the problem rather than part of the answer.

(Good article for MMT’s to earn some hearts!)

Obama to Push Tax Break

Hard to believe that a Democratic administration is proposing only support for business and none for consumption.

While it might be an election ploy the fact that it’s been a pattern all along just adds more weight to the notion that this administration is a tool of big business as it works to keep unemployment high and domestic consumption down along the lines of the classic gold standard export model of growth. This notion is further supported by the official goal of doubling exports, and Bernanke stated before Congress a couple of years ago that he prefers exports to domestic consumption (not that anything he does actually matters for that purpose).

News Alert from The Wall Street Journal

President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.

The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways.

U.S. Green Party takes historic monetary step!

A very sad day for the green party.

On Sat, Sep 4, 2010 at 3:09 AM, AMI wrote:

Dear Friends of the American Monetary Institute,

Some exciting and historic news from the U.S. Green Party!

This past week (end of August 2010) the Green Party’s National Committee working on monetary and economic policy matters have approved an historic, comprehensive Monetary Reform Plank in their 2010 Platform which actually does the job, as it includes all three of the necessary elements to achieve real reform. We’re happy to report this mirrors the proposed American Monetary Act.

Here below and linked at http://www.monetary.org/greenpartymonetaryplank.html is what the U.S. Green Party approved, please read it carefully.


Sincerely,
Stephen Zarlenga
Director
American Monetary Institute

Monetary Reform (Greening the dollar)

“While the banking reforms outlined in the above 12 points are very important to ameliorate the present crisis in our banking system, to affect long term, transformative change, it is imperative that we restructure our poorly conceived monetary system. The present mis-structured system of privatized control has resulted in the misdirection of our resources to speculation, toxic loans, and phony financial instruments that create huge profits for the few but no real wealth or jobs. It is both possible and necessary for our government to take back its special money creation privilege and spend this money into circulation through a carefully controlled policy of directing funds, through community banks and interest-free loans, to local and state government entities to be used for infrastructure, health, education, and the arts This would add millions of good jobs, enrich our communities, and go a long ways toward ending the current deep recession.

To reverse the privatization of control over the money issuing process of our nation’s monetary system; to reverse its resulting obscene and undeserved concentration of wealth and income; to place it within a more equitable public system of governmental checks and balances; and to end the regular recurrence of severe and disruptive banking crises such as the ongoing financial crisis which threatens the livelihood of millions; the Green Party supports the following interconnected,

Green Solutions:

1. Nationalize the 12 Federal Reserve Banks, reconstituting them and the Federal Reserve Systems Washington Board of Governors under a new Monetary Authority Board within the U.S. Treasury. The private creation of money or credit which substitutes for money, will cease and with it the reckless and fraudulent practices that have led to the present financial and economic crisis.

2. Create a Monetary Authority, which will, with assistance from the FDIC, the SEC, the U.S. Treasury, the Congressional Budget Office, and others, redefine bank lending rules and procedures to end the privilege banks now have to create money when they extend their credit, by ending what is known as the fractional reserve system in an elegant, non disruptive manner. Banks will be encouraged to continue as profit making companies, extending loans of real money at interest; acting as intermediaries between those clients seeking a return on their savings and those clients ready and able to pay for borrowing the money; but banks will no longer be creators of what we are using for money. Many new forms of banks will be encouraged such as community banks, credit unions, etc., see 11 and 12 above)

3. The new money that must be regularly added to an improving system as population and commerce grow will be created and spent into circulation by the U. S. Government for infrastructure, including the human infrastructure of education and health care. This begins with the $2.2 trillion the American Society of Civil Engineers warns us is needed to bring existing infrastructure to safe levels over the next 5 years. Per capita guidelines will assure a fair distribution of such expenditures across the United States, creating good jobs, re-invigorating the local economies and re-funding government at all levels. As this money is paid out to various contractors, they in turn pay their suppliers and laborers who in turn pay for their living expenses and ultimately this money gets deposited into banks, which are then in a position to make loans of this money, according to the new regulations.”