Commentary | Economic Growth

Obama stimulus plan is smart, necessary—except business tax cuts

It is heartening that the new Congress is tackling the economic crisis with the urgency it deserves. The economy is slowing dramatically, and 15 million Americans are now unemployed or underemployed. The numbers worsen every month, and if state and local governments meet their budget shortfalls by cutting services and laying off employees, the pace of job losses will accelerate. Without immediate and very sizeable intervention, unemployment could top10 percent next year.

Most of the stimulus plan proposed by the incoming Obama administration is exactly what is needed, including aid to states, an emphasis on education — including early childhood — and investment in the nation’s infrastructure — the backbone of a productive economy. The United States has allowed its infrastructure to deteriorate to the point that dikes and bridges fail catastrophically, our drinking water suffers, our mass transit systems badly lag the rest of the world, and our broadband connectivity is slower and reaches a smaller share of our citizens than equivalent systems in Korea, Japan and other allies and competitors. The condition of many school buildings — some built in the 19th century — is deplorable and hurts the performance of teachers and students. The money in this rescue package is a small down payment on what is needed to give the U.S. the world class infrastructure we need.

However, the tax portions of the package are a mixed bag. Middle class taxpayers will benefit from the AMT fix and the Make Work Pay tax credit, but the business tax cuts are mostly a waste of resources that could be much better spent elsewhere. The job creation potential of a one-time $3,000 tax credit for hiring new workers is questionable, at best, as are the stimulus effects of accelerated depreciation and reducing past income tax liabilities by taking into account recent business losses. It will be particularly hard to watch the banks and construction companies that made billions during the housing bubble get a windfall they don’t deserve.

It is instructive to compare the negligible job creation potential of these tax cuts with the hotly contested but far cheaper effort to rescue the domestic auto companies. If saving the Big 3 from bankruptcy would cost $100 billion — the mid-range of estimates by Mark Zandi of — but prevent the loss of 1 million to 3 million jobs, its “bang-for-the-buck” would equal or exceed even the best parts of the stimulus proposal, let alone the wasteful business tax cuts.

There are many causes of this downturn, including our astronomical trade deficit – the result of two decades of one-sided trade agreements and failure to respond to the unfair practices of other nations – which have not been addressed. The reckless greed of so many financial institutions and speculators is a major cause of our current problems, and the damage done to millions of homeowners remains largely unaddressed. The dwindling strength of unions has contributed to wage suppression, the loss of fringe benefits, and the end of retirement security for the average American. The ultimate health of our economy cannot be assured without addressing these problems and the dangerous growth in inequality associated with them. We need an economy that creates broadly shared prosperity, not just for executives and professionals, but for every segment of society.

See related work on Recession/stimulus | Economic Growth