Will Obama's Spending Plan Boost the Economy?

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road constructionPresident Obama is unveiling this week what some have dubbed his "second stimulus." There's $50 billion more in infrastructure spending on roads and bridges, $100 billion to make a research and development tax credit permanent, and a $200 billion program to convince America's boardrooms to buy more equipment in the next two years.

Will this really help the economy or is this an Obama political stratagem to pull the Democrats out of the basement before the November mid-term election?

Bang for the Infrastructure Buck

Speaking in Milwaukee on Monday, Obama said his infrastructure proposal "will not only create jobs immediately, it's also going to make our economy hum over the long haul." He said that over the next six years, the money would finance the construction of 150,000 miles of road, 4,000 miles of railways and 150 miles of runways and invest in a next-generation air traffic control system to reduce congestion at the nation's overcrowded airports.

Obama said the plan would be paid for and would not add to the deficit. It would be paid for over 10 years by closing tax loopholes such as manufacturing tax deductions and depreciation allowances.

"I think this is going to help around the edged – I'd certainly like to see more," says Augustine Faucher, director of macroeconomics at Moody's economy.com. Faucher says that every dollar of government money spent on infrastructure creates about $1.57 of higher GDP in the following year.

Even if the new money is not spent until 2012, Faucher says, he is forecasting unemployment at between 8% and 9% by then. "There's still going to be a lot of unemployed workers out there in 2012, "so if we can get some more spending and get some of those people working I think that's fine."

Just Moving Money Around?

But John Makin, a visiting scholar at the American Enterprise Institute, says that if Obama's infrastructure proposal is paid for by taking funds from other federal accounts, that won't help boost the economy. "If you're going to pay for it, its not stimulative, it's just re-allocative," Makin says. In other words, there won't be new spending, just shuffling money from one pocket to the other.

Makin was particularly critical of Obama's plan to try to cajole businesses into spending more for equipment, machinery and software in the next two years rather than waiting for later developments on the economic front to decide.

'I think anybody who wants to do any capital spending will do it at the end of 2011," Makin says. "There is huge excess capacity now -- it's not that we're short of capacity. It's the same thing as Cash for Clunkers and the home buyer's tax credit -- pull the spending forward."

Thanks to the recession, many economists believe that companies have adequate cash on hand to make investments, but that they are hesitating to buy new equipment because they fear higher taxes or a stumbling economy in the first half of next year.

Faucher of economy.com think the accelerated capital spending will help the economy marginally. He notes that business spending has already been rising: it's up 16% since it hit a low in the first quarter of 2009.

"It does provide more of an incentive for businesses to invest," Faucher says. "But I don't think any of these individual pieces is the answer, I think its gong to be a combination of factors designed to push spending."

The Looming Election

Both Faucher and Makin believe the Obama proposals were essentially political motivated in nature, trying to shore up support for the Democrats who are trailing in the polls. "[Congress] couldn't get it done before the recess and my general thought is it's going to be harder afterward because the Republicans are smelling victory and don't want to give Obama any legislative victories between now and November 2," Makin says.

White House aides told The Washington Post that Obama had ruled out repealing or lowering the payroll tax for a sustained period of time because it would cost too much money. Sen. John McCain was highly critical of Obama's proposals, saying that "the point is that the Obama Keynesian on steroids has not worked. The economic policies have failed," McCain said.

McCain said that instead the government should be looking at extending the Bush tax cuts, which expire at the end of the year. Obama has proposed extending the cuts for everyone making less than $250,000.

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884 Comments

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stnblair1

Tell what you see for banks stop robbing senior on rates paided on CD.

September 14 2010 at 11:37 AM Report abuse rate up rate down Reply
Dennis

Why haven't I heard any conservatives crying about the $801 billion spent on the Bush/Cheney's war in Iraq? Obama wants to spend $50 billion to improve the infastructure here in the U.S. and you all want to vilify him for that? You want him to cut the deficit, but you don't want him to eliminate tax cuts for the rich? You want him to make sure Wall Street doesn't screw Main Street again, but you're against government regulations? Obama has tried to work with Congress and Boehner has fought him at every turn. In fact, the Republicans want him to fail so they can regain power. The irony is that if Obama fails, the country fails. So this isn't really about what's good for the country, it's about how the Republicans can regain control of the government. Obama may be having trouble pulling us out of the ditch, but you all need to remember who drove us into the ditch.

September 08 2010 at 8:54 PM Report abuse -1 rate up rate down Reply
CJ

Sustaining jobs will be new energy companies and other companies that will provide jobs for years to come. I don't see that in Obama's plan.

September 08 2010 at 5:41 PM Report abuse +4 rate up rate down Reply
partsautomall

NEED TO KEEP HIM IN CHECK UNTIL NOVEMBER.HE NEEDS TO BE A LAME DUCK

September 08 2010 at 4:43 PM Report abuse +4 rate up rate down Reply
1 reply to partsautomall's comment
Ed Baggett

When stimulus money is spent in the economy, it is "stimulating" goods & services. The fact that money is dispensed to taxpayers, it is in fact a tax cut because money is returned to who paid into the treasury. So, what are you bitching about ?

September 08 2010 at 4:32 PM Report abuse -5 rate up rate down Reply
1 reply to Ed Baggett's comment
johnebare

The best thing the government can do for the economy is to get out of the way! Leave people and business more of their own dollars by GREATLY reducing taxes. The more money individuals can take home in their paychecks the more they will have to spend on goods and services. The more cash a business has on hand the more they will have for expansion and hiring. The more people working and spending, the bigger the tax base. Problem solved.

September 08 2010 at 4:27 PM Report abuse +5 rate up rate down Reply
1 reply to johnebare's comment
lhudson828

Not only NO but hell no!

September 08 2010 at 4:23 PM Report abuse +1 rate up rate down Reply
anniesez455

Do not listen to Obama's forked tongue. It is easy to see his body language..As another poster said...smoke and mirrors..I totally agree. This man is NOT what we believed him to be !

September 08 2010 at 4:22 PM Report abuse +2 rate up rate down Reply
1 reply to anniesez455's comment
thepetermedic

HE MAY AS WEE SPEND OUT TAX DOLLARS SAVED UP SOMEONE NEEDS TO SPEND TO KEEP THE COUNTRY AND ALL THE ONES OUT OF WORK SURE CANT SPEND A DIME

September 08 2010 at 4:08 PM Report abuse -2 rate up rate down Reply
Alan

This is just more smoke and mirrors. It is what got him elected and he still beleives the American People are stupid enough to fall for more of it. It is time to prove him wrong in the next two elections. Don't fall for the lies again and you really do not have to prove you are socially and politically correct. The Liberals love it when they can get you to feel guilty. It is all they really have.

September 08 2010 at 3:19 PM Report abuse +1 rate up rate down Reply