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An Economist Evaluates Obama’s New Economic Ideas

Ryan Faughnder |
September 9, 2010 | 5:32 p.m. PDT

Staff Reporter

Graphic by Monica Nguyen
Graphic by Monica Nguyen
With the country still crawling out of a recession and unemployment hanging at 9.6 percent, President Obama pitched his new proposals to encourage businesses to hire more workers in a speech in Ohio on Wednesday

The speech detailed plans to make permanent a tax credit for businesses’ research and development and give a tax break for companies’ capital investments through 2011. In addition, the administration wants to throw in $50 billion for infrastructure.

We spoke with USC economics expert Aris Protopapadakis to get closer to the truth about how these proposals might affect the economy and unemployment.

Neon Tommy: Overall, what are your reactions to President Obama’s proposals?

Aris Protopapadakis: Well, tax credits for investment is a long story. Back in the Johnson administration, that was a big item. The big problem with all this stuff is that it’s sold as temporary. The thing that we know from economics about temporary stuff is that it may displace purchasing, consumption, whatever it’s targeted to, but it doesn’t necessarily change the incentives overall.

We saw in the “Cash for Clunkers” program where, immediately after the thing ended, there was a slump. And we saw that in the housing debate. It moves things forward a little bit. Does it make a lot of difference? It does at the time it’s in effect. Afterwards, if it somehow manages to kick in more activity, maybe some of it is left over - it’s hard to tell. But permanent stuff is always better than temporary stuff in terms of actually changing incentives.

NT: What about the proposal to permanently extend the credit for research and innovation?

AP: That is a permanent thing. That is something that was around for a while. I didn’t realize that that was something that was getting renewed. So all that does it make it permanent, which is a good thing. If you do it, you ought to do it on a permanent basis.

NT: How is this any different from the first stimulus package?

AP: I don’t think it’s different — it’s just later. It is more targeted to infrastructure, rather than sort of everything that you can think of. In that sense, it’s different, but it’s the same idea.

A lot of people say [the first stimulus package] didn’t work. I don’t think anybody knows whether it worked or not… The Republicans have taken the view that this is a total failure. They have no basis to say this. To say that it created five million or four million jobs, we have no basis to say this either.

This is more of the same, but it’s targeted directly to investment rather than consumption, and that’s a good thing, because we know that it’s going to be hard to stimulate consumption. People are trying to save more, and they’re trying to build their wealth. And so stimulating the other side is actually a better idea.

NT: So, why aren’t businesses hiring?

AP: There are several reasons why there’s a delay between increases in employment and the end of a recession. If you look back at the last couple of recessions we’ve had, although they were very mild, it took a long time for employment to start increasing again. You may remember jobless recovery talk after 2001, and that was a year and a half before unemployment started falling… And people are expensive to hire. They’re not expensive to fire in this country, but they’re expensive to hire. And so, companies are reluctant, and there’s a lot of uncertainty about what’s going to happen.

NT: Isn’t there a conflict between lowering the deficit and boosting employment?

AP: There is no conflict in the sense that you are raising the deficit every time you say you’re going to spend stuff. If you go back and cut expenditures somewhere else, it’s not obvious that you’ve done anything, net. This idea that you shouldn’t raise the deficit but stimulate the economy anyway is just not mechanically possible. One story is that if you drop taxes, employment will increase and you’ll get it back in more tax revenues. That hasn’t really happened. In principle, it can happen. You’re going to have to increase expenditures one way or the other. If you increase expenditures, you’re going to have more deficit in the short run.

I don’t think that’s a big problem right now, actually. We have a huge deficit, and if we continue that it’s going to be a problem, but I don’t think that’s what’s driving anything right now. Yesterday, the Wall Street Journal was saying the government was coming in with $67 billion borrowing, the market just lapped it up, and at the same time it was one of the busiest days of the year for private company sales of debt. There’s a lot of money out there to be borrowed. We can’t do that in the long term because that’s money that could be used much better, but right now I don’t think that’s the main thing.

NT: The President also spoke about plans to extend most of the Bush-era tax cuts. Republican leader John Boehner said, “You can’t have a strong economy if you're raising taxes on the very people who you expect to invest in our economy to begin hiring again.” Is there any truth to this?

AP: Well, these are personal taxes, not corporate taxes, so there's a confusion right there... If you told me, "Let's raise corporate taxes," I'd say, "That's a bad idea." I think all economists, except when they're advising politicians, would agree with that.   

Graphic designed by staff reporter Monica Nguyen.


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