Will Obama's Spending Plan Boost the Economy?

road construction
road construction

President 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.