Sunday, September 12, 2010

Obama continues to gamble with the economy

Published in The Tennessean, Sunday, September 12, 2010

Obama continues to gamble with the economy

By Richard J. Grant


The Obama administration continues to throw “stimulus” mud on the wall with the hope that some of it will eventually stick. The next splat to hit the wall will be $50 billion of spending on infrastructure projects that were, apparently, not of a sufficiently high priority to be included in the previous flurries of stimulus spending.

Any attempt to explain this new spending proposal in terms of the “national interest” will result in bewilderment. It makes sense only from the perspective of the people who are pushing it and stand to gain from it. That would be the politicians and staffers whose futures depend on swaying voters’ minds before the November elections. It would also be those businesses and workers who expect to be the first recipients of the anticipated government spending.

In politics, it is often said that “perception is reality.” It is also said that in comedy, timing is everything. The politicians that best manage voter perceptions in the next eight weeks will be the ones laughing in November.

The new $50 billion won’t be spent before the elections. It might not even get through Congress by then. But it has been promised in the hope that enough voters will fall for it to make a difference on Election Day.

The Obama administration has also called for the creation of a national “infrastructure bank” to allow the federal government to give low-interest loans to local governments. The news reports fall into the trap of referring to these loans as “low-cost,” but that is to confuse the true cost with the nominal price. Federal taxpayers will pay for the road, rail, and airport upgrades way beyond the levels that actual passengers would have been willing to support by themselves.

The “infrastructure bank” is just the latest political vehicle with which to deliver the illusion of something for nothing. But its cost will be a lot more than nothing. It will turn out to be a Fannie and Freddy on wheels.

There is one new proposal by the administration that does make some sense. That is to allow businesses to write off 100 percent of new investments in plants and equipment in the current year, rather than expense it over three to 20 years. A shortcoming is that it will apply only through 2011. That doesn’t allow much time for thoughtful planning of new long-term projects.

Ironically, such tax write-offs are of higher value when tax rates are higher. It just happens that the Obama administration has chosen to let income and investment-related tax rates rise in January 2011. The political gamble is that voters will be silly enough to believe that the value of the temporary write-offs is greater than the long-term supply-side burden of the tax-rate increases.

The obvious question is, “Why not just cancel all the scheduled tax-rate increases?” An even better question would be, “Why not cut tax rates?” Either of these actions would help to make the current majority party less unpopular. There would also be no danger of reduced tax revenues, given that reducing tax rates would increase business returns and encourage business activity. Tax rates are already so high that we have observed an inverse relationship between marginal tax rates and tax revenues. In other words, lower marginal rates would actually increase total tax revenue collections.

If the Obama administration were more concerned about economic recovery and long-term prosperity than about redistribution and leveling, then it would simplify and cut tax rates – and more. It would reduce the size and scope of government spending as well as simplify and reduce the compliance burden of the whole regulatory structure.

Our current governing trend is toward dissipation and loss of international standing. If we don’t soon regain a moral and constitutional attitude, get our government spending under control and eliminate the budget deficit, then it will be more than mud that hits the wall.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

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