Sunday Times (London)
September 12, 2010
by Irwin Stelzer
It’s official: there are “widespread signs of a deceleration [in growth] compared with preceding periods”. So concludes the Federal Reserve Board after surveying the state of business around the country. Calm observers would note that slower growth is far from a double dip, that consumer spending is increasing, that “activity was largely stable or slightly up for professional and other non-financial services”, and that a narrowing trade gap will boost third-quarter growth, perhaps to 2.5% from 1.6% in the second quarter.
But incumbent Democratic politicians preparing to face the electorate in 51 days are not calm observers. Nor is their president, who sees huge Republican mid-term gains as a personal rebuke and a bad omen for 2012, when he will have to face the voters. So we have a frenzy of activity, or at least of proposals.
Never mind that nothing that is done between now and the election can influence the economy’s performance — the administration’s advisers are eager to show that the president cares about the plight of the unemployed and those still in work, but worried they might be next for the chop. They know that the voters see Barack Obama’s obsession with a healthcare bill they despise as a diversion from their real concern — the economy. Even the new Middle East peace conference is seen as a presidential diversion of attention from jobs, jobs, jobs — which is why secretary of state Hillary Clinton has been getting most of the photo ops.
So the president has some new proposals: $50 billion of extra spending on infrastructure; an expanded research and experimentation tax credit; and permission for companies to write off 100% of investment outlays through 2011, rather than depreciate them over 3 to 20 years as present law provides.
The tax breaks for businesses will have little effect since what Obama giveth, Obama taketh away The first will almost certainly be rejected by congressmen having trouble explaining to constituents why they supported an almost $1 trillion stimulus that seems to them to have been ineffective.
As for tax breaks for businesses, they will have little effect since what Obama giveth, Obama taketh away — they will be paid for by raising other company taxes. The president might do better simply to lower taxes on small businesses, and let the entrepreneurs decide what to do with the cash, rather than decide for them that research is more worthy of taxpayer largesse than, say, a beefed-up marketing effort that might well create more jobs.
With the federal government in effect out of the game until at least after the election, and most likely a much diminished player if Republicans gain as many seats as most experts now predict they will, we can see a little more clearly what the economy will look like without having to guess the government’s next move. It is almost a certainty that the Fed will keep interest rates low for the foreseeable future. That is good news for the housing market, beset in recent months by plummeting sales. There is a growing sense in the sector that the combination of low mortgage rates and prices already well below peak levels will soon bring buyers back into the market. Indeed, builders are already stockpiling land with infrastructure in place, bought from original developers at bargain prices, in the hope that the good times will soon roll again. But not soon enough to have much impact on the election.
Meanwhile, the policy debate goes on. Some feel that the Fed should be more aggressive. Former Fed governor and now Princeton University professor Alan Blinder is suggesting that instead of paying banks interest on their $1 trillion in excess reserves, the Fed charge them for holding those reserves as an incentive to get them to lend rather than hoard funds. Blinder also thinks the Fed could give the economy a boost by persuading its risk-averse regulators to ease up on the banks because “some modest loans are not sinful, but rather a normal part of the lending business”.
Others argue that the administration should step up spending, even at the expense of increasing the deficit, both because they fear a double dip and because they believe the economy’s infrastructure is sorely in need of shoring up to support more rapid economic growth. Deficit hawks, seemingly backed by most voters, counter that until the government gets its fiscal house in order, and the president abandons his anti-business rhetoric, firms will sit on their cash.
However, anti-spending doesn’t mean anti-deficit in the tangled skein that is pre-election politics in America. At the end of the year the Bush tax cuts will expire. The president wants to retain the lower taxes for all but the rich — families with annual earnings of more than $250,000. His Republican opponents, and an increasing number of Democrats who fear raising taxes in the middle of a fragile recovery, want the cuts to remain in place for all, at least for 2011 and possibly 2012. Obama says the rich don’t need lower taxes, and that raising their taxes will help to reduce the deficit. His opponents say the geese the president sees right for the plucking include lots of small-business owners who will create fewer jobs if their taxes go up.
Meanwhile, the economy plods along on two tracks — the express lane for big companies, the slow lane for smaller ones. In the financial-services sector the big banks are doing just fine, while many smaller banks are unable to cope with the bad loans in their portfolios. In the industrial sector, large companies that diversified into overseas markets are growing rapidly; smaller companies more dependent on domestic markets and with lesser access to credit are struggling.
All of which is the stuff that has investors confused — one day euphoric, the next certain that the world as they know it is coming to an end. In the longer term, all might matter less than the fact that once past the election, the country will have to decide what to do about its huge deficit, swollen when the healthcare bill takes full effect, the ageing baby boomers apply for their new hips, and possibly lethal should China decide for geopolitical reasons to cash in some of its made-in-America IOUs.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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