Obama’s Stimulus II

By :: December 8th, 2009

At Brookings today, President Obama laid out his vision for Stimulus II. At first glance, this seems to be a collection of odds-and-ends, only some of which will help the economy grow and create jobs.


Although few details are available, the package seems mostly focused on helping small business. That’s an important goal, although I’m not sure the president’s proposals will get us there. For instance, he’d eliminate capital gains taxes on the sale of small firms, allow them to continue to expense capital investment, and give them tax breaks for hiring new workers. It is hard to imagine a small business owner who is starved for cash and unable to get a bank loan thinking very much about buying new equipment or hiring new workers, much less capital gains. It’s a bit like throwing a drowning man a 64-inch flat panel TV. He might love to have one, but not right now.


Obama is also proposing to expand the Small Business Administration loan program. That’s a better idea, but I’m not sure SBA loans are the best way for credit-worthy companies to borrow. I’m not a monetary policy guy, but it seems that’s where the solution lies. I’d rather the Fed find a way to get small and regional banks lending again than fiddle around with an inefficient fiscal policy. Much of this would be funded with TARP bailout money that has either been repaid or not yet spent.     


Obama would also create new subsidies to retrofit homes for energy efficiency (aka cash for caulkers), spend more money for infrastructure, and provide additional aid for states. These also feel like off-the-shelf proposals that sound better than they are. The infrastructure funding, especially, seems odd. Today, 70-75 percent of Stimulus I remains unspent and it will be a year or more before that first tranche gets into the economy. It turns out that many projects were not quite as shovel-ready as some thought, so what good does it do to add to the backlog?


This has the feel of a check-the-box exercise. Need to make the governor’s happy? Give them some highway money and extend direct federal aid. Searching for a few GOP votes? Help out small business—and do it with tax cuts. As The Washington Post wrote this morning in the most unintentionally funny lines of the day: "'Politics may ultimately play into the decision of how to use the unspent bailout funds,’ analysts say.” Ya think?  


It would be nice if Obama would do with the economy what he did with Afghanistan. That is to say, step back, set a goal, and adopt the tactics necessary to achieve it. Obama has done only half that exercise.


In the short run, the economy and job creation are being weighed down by three interrelated burdens: an upcoming round of new residential mortgage foreclosures, a big overhang of failing commercial real estate projects, and banks that remain unable—or unwilling-- to lend, especially to small businesses. If a company has access to the capital markets, it can sell stock or debt. But if it must rely on bank financing, as 99 percent of U.S. businesses must, it is in big trouble.