Pre-election Policy Paralysis
Nothing that is done between now and the election can very much influence the economy’s performance
12:00 AM, Sep 11, 2010 • By IRWIN M. 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 nonfinancial services,” that seven of the 12 Federal Reserve districts into which the country is divided report economic growth “at a modest pace,” and that a narrowing trade gap is likely to drive third-quarter growth to something like 2.5 percent, from 1.6 percent in the second quarter. As Ian Harwood, chief economist at Evolution Securities, put it in a memo to clients, “Nothing at present indicates that anything worse than a classic mid-cycle slowdown is underway.”
But incumbent Democratic politicians preparing to face the electorate in 51 days are not calm observers. Neither is their president, who sees massive Republican 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 very much influence the economy’s performance – the administration’s advisers are eager to show that the president cares, really cares, about the plight of the unemployed and the sleepless nights of those still in work, but worried that they might be next for the chop. They know that the voters see Barack Obama’s obsession with the costly health care bill they despise, because it is already raising their insurance premiums and reducing their choice of care, as a diversion from attending to their primary concern, the economy. Even achievements such as engineering a new Middle East peace conference are seen as a 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 additional spending on infrastructure; an expanded research and experimentation tax credit; and permission for businesses to write off 100 percent of investment outlays through 2011, rather than depreciate them over 3-to-20 years as current law provides. The first will almost certainly be rejected by Congress, since members of the president’s party are 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 business 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. Or hope that tax credits will somehow induce investment in industries with substantial idle capacity and by firms, many of which do not have substantial profits against which to use the tax credits.
With the federal government effectively 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 Federal Reserve Board 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 industry that the combination of low mortgage rates and house 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.