The Fed is clearly aiming to do the minimum amount it thinks necessary in an effort to extend the effectiveness of its available tools. The other components of the expected action – a cut in the interest rate on excess reserves and a commitment to maintain the size of its balance sheet for an extended period are coming, just not yet. So are additional asset purchases. This is a mistake, and is reminiscent of Fed policy in 2007 – a quarter point cut here a half point cut there, until they woke up to the severity of what was happening around them.
Obama’s “pivot to jobs” was amazingly short – roughly one week in duration. Apparently, we’ve now returned to deficit reduction as the primary focus, with the President unveiling his new millionaire’s tax proposal. This is absurd. Deficit reduction is not the most important issue facing the country right now. In fact, it should be pretty close to the bottom of the list of priorities. When the economy has been growing at a rate >3% per year for at least two years AND unemployment is below 6% and, then we can focus on deficit reduction. Although I have a hunch that once we reach that point, there won’t be much to talk about since most of the deficit “problem” will have resolved itself. As of right now though, it’s a distraction, and anything we do to reduce the deficit will make the economy WORSE.
The official release has a good breakdown and details, so no need to reproduce that here.
$447 Billion Total
$253 Billion in tax cuts/credits
$194 Billion in spending
- Extend last year’s payroll tax cut for another year and increase the cut from 2% to 3.1%. $175 Billion
- Cut employers’ share of payroll taxes in half (from 6.2% to 3.1%) on the first $5 million in payroll (covers 98% of businesses). Eliminate employers’ share of payroll taxes entirely for any new workers or raises for existing workers, up to $50 million per company. $65 Billion
- Extend 100% expensing of new capital investment for businesses for one year. $5 Billion.
- New tax credit of $5600 to $9600 for each veteran hired.
- New tax credit of $4000 for each long term unemployed person hired.
- Direct aid to states to prevent layoffs of teachers, police, and firefighters. $35 Billion
- Modernizing public schools and community colleges. $30 Billion
- Investment in roads, rails, and airports. $50 Billion
- Infrastructure bank creation to attract private funds for additional investment. $10 Billion
- Project Rebuild, putting people to work rehabilitating houses, businesses, and communities. $15 Billion
- Expanding wireless broadband access to >98% of Americans.
- Reform and extension of unemployment insurance. $49 Billion
- Worker training programs. $5 Billion
There’s also a section on helping more Americans refinance at lower rates than are able to today.
My initial thoughts are it’s a decent plan. Highly focused on capital improvements and front loaded. Will have a positive impact, but is too small to reduce unemployment by more than about 1 percentage point over the next year and a half, and after that the stimulus effect peters out. The obsession with “paying for” the plan almost immediately after it ends will hurt the economy at that point. I don’t think a lot of politicians get the fact that stimulus is SUPPOSED TO increase the deficit, that’s how it works. My biggest concern is that it will not survive Congress intact – House Republicans will insist on stripping out almost all of the spending and probably on scaling back some of the consumer (as opposed to business) tax cuts.