Obama has some new proposals for the economy. One is a $50 billion plan to build infrastructure. This is good so far as it goes but $50 billion is not nearly enough. Recently, the Chinese spent $586 billion to build infrastructure. This would be more like it. But the absolutely loony part of Obama's plan is to give business $250 billion in tax writeoffs for plants and equipment. Why five times as much for what is basically a Republican plan? And it won't create new jobs. Here's why. Business will invest in new equipment like computers and automation that will allow them to lay off workers because the machines will do the work that they used to do. So it will actually diminish the number of jobs.
Why can't Obama wise up and give tax breaks to businesses that actually create jobs rather than to businesses in the hopes that they will create jobs? Is that so hard to do? You create a job, you get a tax break. It's that simple. You create two jobs, you get a bigger tax break. And so on. What's the big deal? Under Obama's plan businesses will just take the money, buy new equipment that replaces workers and then lay off workers. The net effect will be just the opposite of what Obama intends to achieve. Again the road to Hell will have been paved with good intentions. It's a fool's errand just to give tax breaks to businesses in general.
Why does Obama keep proposing what are essentially Republican plans? The original stimulus plan was heavily weighted with tax breaks and more lightly weighted with infrastructure building. And where did that get us? We're still in the ditch. Obama's administration is trying to pull the car out of the ditch, but despite their efforts, the car has slipped back in. Businesses are sitting on $2 trillion in cash. Do they really need another tax break or lower interest rates so they can borrow money? No, what they need is more people buying their products, in other words, DEMAND. And there's little demand in the economy because people don't have jobs. Here's the corroboration:
The US economy is experiencing anemic growth, yet businesses are sitting on a mountain of cash worth nearly $2 trillion, according to Federal Reserve estimates. But this trend is nothing new for firms, who have been steadily increasing their cash holdings over the past three decades, a University of Illinois business professor says.
University of Illinois finance professor Heitor Almeida says the fact that businesses are stuffing corporate piggy banks with spare cash for the proverbial "rainy day" is unrelated to the belt-tightening brought about by the continuing financial crisis.
"There's not really a consensus on what accounts for businesses holding so much cash, but they've been doing it way before the downturn, at least since the early 1980s," he said. "Cash hoarding is definitely not related to the financial crisis. It's a pattern that's been going on for at least three decades."
Although there was a time shortly after the crisis when firms had difficulty raising capital, Almeida says most businesses entered it in a "very liquid position."
"When the crisis hit, firms had a lot of cash on hand, and they used it to avoid decreasing investment and firing employees," he said. "If businesses hadn't had all that cash on hand, things could have been much, much worse."
Almeida says companies that survived the financial shocks of the past few years are still jittery about weak consumer demand in the U.S. and an increasingly dismal forecast for the global recovery, so they'll likely continue to sit on their piles of cash.
"You would think if they had better uses for that cash they would have spent it, but for some reason corporations have decided that the best thing they can do is keep the cash on the balance sheet," he said.
Part of this is due to most big firms being multinational, allowing them to park the bulk of their cash outside of the U.S. in tax havens.
"If you keep profits outside of the U.S., obviously, they won't get taxed," he said. "The way U.S. tax laws are written is that firms pay taxes the moment they repatriate the cash, which would be quite costly to shareholders."
Almeida says there were proposals to give firms a tax break if they brought their money back to the U.S., but reviving such a proposal now "wouldn't be a politically viable option, especially not after all the bank bailouts."
If repatriating the cash is off the table, shouldn't shareholders demand some of that cash be re-paid as dividends?
"Firms are not obligated to pay dividends, and it's pretty much the case that the most successful firms are going to be the ones that hoard the most cash," Almeida said. "A really successful company like Google or Apple, for example, isn't going to go to the market and issue $30 billion in equity only to turn around and sit on the cash. With extremely successful companies, cash just accumulates. Shareholders may get mad, but cash-holding is positively correlated with shareholder returns, so it's no surprise."
Almeida said even if companies did open up the coffers and flood the economy with cash, what might be good for job creation in the short-term might not necessarily be consonant with what shareholders want.
"If you invest money to create jobs but generate negative profits, that's not good for shareholders," he said. "So that's probably not what firms should be doing, as much as we want to grow jobs."
Stimulating lending by further lowering interest rates is not likely to have much of an effect on job creation, either.
"The fact that firms have cash suggests that getting banks to lend more isn't the way to go," Almeida said. "Firms already have cash but they're not spending it. So what's the point of having banks make more loans, if firms don't need the cash?"
So in addition to having large amounts of cash parked offshore where it is adding to the deficit because it can't be taxed, businesses have tons of cash which negates Bernanke's policy of cheap money. The Fed lowering interest rates has no effect on stimulating the economy because businesses don't need to borrow money. Lowering their taxes will have no stimulative effect for the same reason nor will it create jobs.
Infrastructure rebuilding and building puts people back to work and improves the US in general. This creates demand and further stimulates the economy because it opens up opportunities for private sector investment that can actually make money. It has been estimated that we need a $2 trillion investment in infrastructure just to bring it up to par. Why won't Obama propose a massive investment in infrastructure? I'll tell you why. Because they would label him as a socialist. So what? According to him, they call him a dog already. Why should he be afraid of more labels when they have already called him every name in the book? Obama, like Clinton, has a penchant for pandering to Republicans. I guess he thinks it's cool. He needs to channel his inner FDR. FDR called out the corporations and the big wigs that ran them. He called them "economic royalists." Obama needs to do the same.
Obama seems to think that small business is the engine for job creation. Mr. President, think again. In 2005 small businesses lost about a million jobs, even as the overall economy expanded by about 2.5 million. The problem is small businesses lose more jobs than they create.
President Obama recently scarfed a “super sub” to show his support for mom-and-pop businesses, crediting the little guy with the majority of U.S. job growth. Every modern president has done the same. There’s just one problem: it isn’t true, according to a new study published by the National Bureau of Economic Research. The work—the first to track employment by age and size of the hiring company—found that small, mature firms (those with fewer than 500 employees and at least 10 years in operation) are actually net drags on job growth. On average, between 1992 and 2005, they destroyed more salaries than they created. In 2005, for example, small businesses lost about a million jobs, even as the overall economy expanded by about 2.5 million. Startups accounted for nearly all the growth.
Next idea? At least Obama and his team might consider getting their facts straight!
Neither Obama nor his economic team have really gotten to the bottom of our current malaise. They have not understood the roots of the problem. Since they have no theory or analysis of root causes, they just recycle warmed over Republican lite and Democrat lite proposals and wait for the economy to magically improve. But it's not happening. I agree with Boehner on one thing. He should get rid of his whole economic team and bring in new people. After all they have failed him miserably. Their advice is not worth anything. Why does he keep them around? I think Boehner actually wants Obama to keep his current team and, by calling for their dismissal, Boehner is actually setting Obama up to keep them in place because Obama doesn't want to cave in to the likes of Boehner.
The only thing that will work at this point is for the government to create jobs directly and not pander to the private sector in the hopes that they will create jobs instead of continuing their outsourcing, computerization and automating. There is a huge deficit in infrastructure and only the government can fix that. Obama should launch a massive infrastructure building plan, and I promise you that that will accomplish two things: 1) It will put people back to work immediately and 2) It will put the US in better shape with respect to badly needed infrastructure repair and help us catch up with the rest of the world which has already passed us by in transportation and green energy development.
Obama keeps recycling Republican lite proposals ala Bill Clinton. If he can't manage to come up with plans ala FDR, it's not going to help the economy which was in bad shape jobwise even before the Great Recession. Bush in his eight years in office managed to add only 3 million jobs to the economy. Compare that with Clinton who added 23 million jobs during his eight years in office. Bush's record represents the worst track record for job creation since the government began to keep records. The job situation has been a disaster for years. But Obama's tepid response has only landed him and his party up in deep trouble precisely because the analysis by his economic team and consequently their new proposals have been horrible failures. Now at the last minute before the November elections, Obama is trying to pull the cat out of the bag with more tepid proposals, more Republican lite proposals. It's not working and it won't work. Obama's only hope is that the American public will wake up and see that what the Republicans have in store for them, should they take power in November, is something so much worse that they will pray for the day when the Democrats still held power and at least there was some hope for job creation. If Obama gets another chance, let's hope he does something more radical than warmed over, tepid Republican lite proposals. Let's hope he channels the spirit of FDR.
