GDP stimulus plan from the Democrats

I wanted to provide some commentary about the Democrat’s stimulus package that has just been introduced. The most important thing about the plan is not the dollar amount of the package.  That will surely change as the proposal makes its way through Congress and as businesses and State and local governments adjust to the recessionary economy.

The most important thing is to examine the details for suggested stimulus to get a feel for how the Obama Administration plans to Administer the economy. Turns out that there are some interesting suggestions.

• The first detail of note is that it is a two-year package. This is interesting because it gives a sense of how the Obama Administration views the economic damage done to the country.

If they thought that the problems were deeply structural and very intractable then the proposal would likely be extended over a longer time period. Most economic historians feel that the Great Depression began c. 1929 and that the U.S. and the Rest of the World did not exit the GD until c. 1946! That is a remarkable 17 years. These same historians credit the massive amount of money pumped into the economy by the U.S. government to fight World War II as the cause for the end of the GD.

As a brief aside, because we have been a net borrower as a nation for a very looooong time, we taxpayers still pay interest on the debt that was issued to finance World War II. I think that you would agree with me that fighting WWII was an investment worth making.

So back to Obama. He and his advisors feel that 2 years is enough time to right things. You have to remember that the 2-year figure has got to be a “worst-case scenario” from their point of view because they don’t want to too conservatively estimate the recovery time and find themselves up for re-election in 4 years having to explain why they got “the economy” so wrong.

So despite the rhetoric from the Dems (“a crisis not seen since the Great Depression”), they seem to be fairly optimistic about the length of time it will take to right the economy.

• The second thing of note is the way that they plan to distribute the monies of the stimulus package. The total dollar amount asked for is $825 billion, with $550 billion being for new spending and $275 billion being for tax relief.

Before talking about the specifics, anytime you see round figures with regard to finance, investing and economics you know that you are dealing with non-specific, estimated information. $825 billion, for example, is a round number.

OK, now specifically the stimulus package awards businesses that are proactive about their problems. This is not alms for the poor (and stupid). Businesses will be given the ability to take additional depreciation on new investments in “Property, Plant & Equipment.”

For those of you not tax savvy just know that depreciation is a form of a tax shelter for businesses. But note that corporations only get the additional depreciation if they choose to invest. This is an incentive to stimulate the economy and to spend some of the cash that many businesses are hoarding. This is a great idea.

The plan also allows businesses to apply losses sustained in 2008 against earnings/profits earned up to 3 years ago (the current standard is 2 years back). Again, this is a great idea. Why? Because it is a very cheap way to stimulate the economy as only businesses that earn profits will care about the ability to offset tax liabilities.

This also helps companies on the margin that were earning profits in the boom times and who are now not earning them. Businesses receiving money from TARP (the BAILOUT) are ineligible for this tax relief. So that addresses the tax relief portion of the plan.

The majority of the stimulus monies are payments made into the economy – i.e. government spending [cue dramatic music]. $90 billion is a payment by the Feds to the States to increase the share of Medicaid paid by the U.S. $79 billion is an effort to offset State cuts to education.

If the U.S. is to remain competitive then our educational system has to be maintained, and eventually improved. The difficulty for the States is that most of them have constitutions that require their budgets to be balanced, so sans Federal stimulus they would be forced to cut a lot of their programs in order to keep their budgets balanced. Again, the Obama Administration is thinking long-term and doing practical things to help the economy.

$43 billion is going to improve transportation. Again, this is a long-term competitiveness issue. All you have to do is drive through South America to see what a big deal roads and transportation are for an economy to function well.

There are also tax cuts proposed in the form of income tax credits $500 for each worker and $1,000 for each couple. I am assuming that these credits do not apply for the upper echelons of income earners in our country given Obama’s campaign rhetoric.

This is similar to the business stimulus in that only those earning money benefit from the plan. This provides limited economic stimulus as most people who want to work are or are trying. There are probably very few people sitting on the sidelines saying, “Heck, if I can save $500 on my taxes next year just for working then I will!”

In general, I give this plan a B-.

The primary reason for my grade is that the stimulus really does not do too much new investing in the economy. The majority of the plan goes to maintaining the status quo economically.

The one aspect of the plan that I really like is increasing the amount of depreciation that can be taken on new investments in “Property, Plant & Equipment.” I think I would have liked to have seen more incentives for investments in (pardon me for this): Property, Planet and Earthquipment. In other words, I would have liked to seen more stimulus to help develop future energy technologies.

There are, in fact, limited provisos to incentivize businesses to invest in renewable energies. Perhaps a bigger commitment to new energy is coming in the formal budget proposal from the Obama Administration. We’ll wait and see.

Meanwhile a firm that I have never heard of (but I am far less than omniscient) called Macroeconomic Advisers is saying that the Obama plan will lead to gross domestic product (GDP) growth of 3.2% over two years. Well duh. The plan is approximately 3% of GDP already and the plan is supposed to unfold over two years – so nice job MA in your forecast.

I hope that each of you has a wonderful Friday.

Jason