President Obama's latest plan to rescue the economy is politics, not economics. The Fed doesn't know what to do, and all we see is sound and fury signifying nothing.
Who's running this insane asylum? It's hard for me to describe the American economy today as anything but a three-ring circus without a master. President Obama suddenly woke up to the impending loss of Democratic control of Congress that looms in the midterm elections this fall, and to the connection between the sorry state of the economy and those bleak Democratic prospects in November. But his response looks more like politics to me than sound economics.
President Obama proposes that Congress should immediately extend the expiring Bush tax cuts for singles with annual incomes below $200,000 and married couples with incomes below $250,000, but he wants to allow the cuts to expire for households with incomes above that threshold. He contends this will have no impact on the growth of small businesses (including most home builders). However, IRS data shows that 48 percent of the net income of sole proprietorships, partnerships and S corporations reported on 2007 tax returns went to households with incomes greater than $200,000. It's clear to me that builders (and other businesses large and small) will be hit by the higher tax rates. Does that make sense with the economy teetering on the brink of dipping back into recession? Marginal tax rate increases impede growth in good times and bad.
Meanwhile, he proposes a new stimulus plan, which hasn't a snowball's chance in hell of passing before the elections, that would allow companies to write off 100 percent of their investment in plants and equipment in 2011, a business tax cut he calculates at $200 billion over two years. He also proposes to spend $50 billion to rebuild crumbling infrastructure. The money would come from a transportation funding bill that is already pending in Congress. And he wants to extend research and development tax credits for businesses. Once again, President Obama favors manufacturing and infrastructure stimulus over housing. Could that be because those industries are more unionized than home building?
For whatever reason, this president has stubbornly refused to use housing as the instrument of economic recovery, even though that's what worked in every recovery over the past 60 years. Instead of choosing the most efficient way to stimulate both consumer spending and confidence, President Obama is playing politics, fiddling while Rome burns!
And while he's making speeches in Cleveland, touting policy turns intended to influence voters, Federal Reserve officials are arguing about how weak the economy must get before they take another step to boost economic growth, and what that step will be, given the dwindling bag of tricks at their disposal. Probably, they will do nothing more than spin a few plates or shoot a dwarf out of a cannon, since the latest data from the Commerce Department is mildly encouraging. Retail sales increased 0.4 percent in August over the previous month, after rising 0.3 percent in July. But weak consumer spending and high unemployment still hobble this economy.
Don't look now, but there are long-term threats to the American economy that dancing elephants and lion tamers cannot cure. For one, the Baby Boom generation of Americans, the target of marketers the world over for 60 years, is cutting back on consumption. They are getting older and spending less, with their retirement plans in jeopardy and their ability to stay in the workforce threatened by the recession and an increasingly high-tech world in which they feel alienated. A story in this morning's Wall Street Journal by reporter Sara Murray points out that nearly half of all Americans now live in a household where someone receives government benefits, and even the leading edge of the Baby Boom has yet to reach full retirement age. Who are we going to sell houses and cars to when the percentage of American households not paying federal income taxes has already grown to an estimated 45 percent in 2010?
The answer, I believe, is the Echo Boom, the Millennials, a generation larger by a third than the Baby Boom. The leading edge of that generation is now in its twenties, so most of them are not yet homeowners. And if we ever want them to be homeowners, we'll have to overcome the glut of articles and advice columns now clogging the Internet, telling them that owning a home is a bad investment choice (as if anything else is better). President Obama, Congress, and everyone in a position of authority around the world needs to understand: If we lose the Millennial generation as homeowners, we will lose them as consumers of most durable goods. And that will be bad news for everyone.
Bring back the tax credit for home buyers … before we are all standing in breadlines!