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The new Obama economic plans
The main new proposals would:
— for the next two years, give businesses a $3,000 income-tax credit for each new full-time employee they hire above the number in their current workforce;
— allow savers with tax-favored Individual Retirement Accounts and 401(k)’s to withdraw 15 percent of those retirement savings, up to a maximum of $10,000, without paying a tax penalty as the law currently requires for withdrawals before age 59 and a half;
— bar financial institutions that take advantage of the Treasury’s rescue plan from foreclosing on the mortgages of any homeowners who are making “good-faith efforts” to make payments;
— direct the Treasury and the Federal Reserve to create a temporary facility for loans to state and local governments, similar to the Fed’s new arrangement to loan corporations money by buying their commercial paper, which are the I.O.U.s that help businesses with daily operating expenses like payrolls.
Here is the article. I doubt if the substitution effect generated by #1 is large. I fear the precedent set by #2 and I don't understand the enforceability of #3. Savings withdrawals are in effect a form of fiscal policy and I don't yet see how fiscal policy is supposed to cure us of our current mess, which is rooted in coordination problems. Let's hope #4 does not become necessary. Of course it is before an election and each candidate has to propose doing something in addition to the status quo. But a lot will happen between now and 1/20; fortunately these proposals won't be taken very seriously.
Here are McCain's proposals, I may discuss them soon.
Posted by Tyler Cowen on October 14, 2008 at 01:39 PM in Economics | Permalink
Comments
State and local bailout is very egregious. Large chunks of the country have not been hit with inflated house values. Bailing out state/local governments is a transfer of money from federal tax revenue from areas that have not gone through a real-estate boom (midwest) to those who have (east coast, ca, fl). Why should taxpayers in Cleveland subsidize Boston condo owners? If the Boston and Massachusetts government collapses, that is really not a concern to Ohio taxpayers. If a Mass. bank collapses, the ripple hurts everyone. Obama doesn't want to say: Drop dead, NYC.
Posted by: charlie at Oct 14, 2008 2:10:07 PM
— for the next two years, give businesses a $3,000 income-tax credit for each new full-time employee they hire above the number in their current workforce;
Sounds like a tax break for corporate fat cats to me.
Posted by: mobile at Oct 14, 2008 2:18:37 PM
I didn't pay taxes on my 401k contribution...then I can take it out tax free, put it in CDs, then put it back in my 401k and reduce my taxes again...why not just cut my taxes?
Posted by: 8 at Oct 14, 2008 2:20:21 PM
I think #1 has creates some weird incentives; of course, the devil is in the details. If you could hire someone to a $25k/yr job and that person reasonably has carrying costs (taxes, benefits, etc.) of another $10k/yr, then the $3k tax credit is nearly a 10% savings. Factor in that such a person is reasonably due a $500 raise in year two (2%) and suddenly laying off that person and re-hiring a raise-less newbie in his place is a $3,500 cost savings on a $35,500 total annual cost.
If that's how the tax credit would work, I see a lot of low-level turnover.
Posted by: LaND at Oct 14, 2008 2:33:25 PM
It looks like #4 allows states to forgo making any decisions on budget cuts. His whole plan is biased heavily towards deficit spending. The feds will borrow money to loan it to states so they won't have to cut spending.
Not good.
Posted by: K T Cat at Oct 14, 2008 2:34:10 PM
The substitution effect may not be large for #1, but it'll still be (unambiguously) inefficient.
I think you should say "#1 is clearly and unambiguously wrong (or economically inefficient), but the deadweight loss just may not be as large as other bonehead policies out there".
Posted by: Scott Wentland at Oct 14, 2008 2:43:04 PM
He's going to win, so we might start seriously considering what an Obama administration will look like. The president proposes, but Congress legislates, so we should look at his history within his party.
Has Obama demonstrated a capacity and interest (1) to generate, fight for and bring home his own policy initiatives and (2) in confronting his own party and voting against their more boneheaded moves? (I recall that he promised to work with the GOP on campaign finance, but immediatly backed down when his leadership called him out; not a promising event.)
If, like Bush, Obama merely rubber stamps legislated domestic policy, then we can ignore his economic policy and ask instead: What would Nancy & Harry do?
Posted by: guy in the veal calf office at Oct 14, 2008 2:54:25 PM
Looking at #1 "for the next two years, give businesses a $3,000 income-tax credit for each new full-time employee they hire above the number in their current workforce"
Barack Obama may be admitting with this proposal that raising the minimum wage over the past two years was a mistake. At $5.15 per hour, the federal minimum wage through June 2006, a full-time employee earning that would see an annual income of $10,712 (assuming 2080 hours worked per year, aka "full time".)
At today's federal minimum wage of $6.55 per hour, and the same full time level of hours per year, an individual earning minimum wage for the entire year would see an annual income of $13,624.
The difference? $13,624 - $10,712 = $2,912.
He's not giving much of a credit for the costs that a business owner has in employing people above and beyond what an employee sees on their paycheck.
But unless he wants to repeat the last two years of declining minimum wage employment levels, look for that business income-tax credit to become permanent and to rise if he gets into office. Talk about deadweight loss!
Posted by: Ironman at Oct 14, 2008 2:59:58 PM
I'm looking to stop mortgage payments. Anyone have the requirments I need to qualify for "good faith effort"...I might retire early this year if neccesary.
Posted by: gabe at Oct 14, 2008 3:00:40 PM
I saw that speech and the crucial (?) element not mentioned in that #1 is that the tax credit is for onshore jobs.
It's supposedly to encourage job creation domestically and discourage offshoring.
Posted by: meter at Oct 14, 2008 3:17:16 PM
Boy, Obama can change his spots whenever he wants to..Why not just drill for oil?
Posted by: jorod at Oct 14, 2008 3:27:58 PM
I think #2 should be limited to hardship situations, like losing a job or costly medical bills. actually, i think it is pretty crappy that's not the case right now.
Posted by: pants at Oct 14, 2008 3:29:36 PM
Isn't #1 an incentive to reduce productivity. Seems equivalent to Keynes suggestion that if necessary people should be hired to dig and fill holes.
Posted by: assman at Oct 14, 2008 3:38:03 PM
"I didn't pay taxes on my 401k contribution...then I can take it out tax free, put it in CDs, then put it back in my 401k and reduce my taxes again...why not just cut my taxes"
You will pay taxes on the funds taken from your 401K. With Obama’s populist plan will not be required to pay an early withdrawal penalty, which I believe is 10%. These funds of course will be added to your regular income possibly throwing you into a higher tax bracket. For some people the extra taxable income may make them ineligible for child tax credits, grants that their college age children may had be eligiable for etc. These funds must be withdrawn with extreme caution even if the penalty is temporary eliminated.
Posted by: panther20 at Oct 14, 2008 3:44:47 PM
Number 2 is wrongheaded if you are a paternalistic government type. People will almost universally shoot themselves in the foot on that one. Even if you are not paternalistic, you'd want to think carefully about this. The tax incentive is designed to offset the demand for a posh retirement welfare program. To some degree, it is finally starting to work.
Posted by: JasonL at Oct 14, 2008 3:48:05 PM
"guy in the veal calf office" wrote: "He's going to win, so we might start seriously considering what an Obama administration will look like."
I, for one, will be surprised if Obama wins. Think about it. Should Obama be elected and the Congress remain Democratic, then we are likely to see our political, economic, religious, and personal freedoms all reduced dramatically because of the enactment of legislation to do such things as; 1) reinstate the “Fairness Doctrine” (requiring that anyone airing a show about one side of a political issue would have to devote “equal time” to the other side); 2) nationalize health care (reducing the freedom of people to choose their own doctors and people’s freedom to choose the scope of their own treatment because nationalization means shortages like those in Canada and Great Brittan where heath care is nationalized); 3) curtain the rights of people to keep and bear arms (Obama and Biden both have a history of being for legislation to reduced this Constitutional right); 4) increase the taxes upon those who are currently paying the bulk of US taxes (the Obama rhetoric is that 95% of citizens will get income tax cuts is sophism of the first order because of the large % of citizens who pay NO income taxes currently); 5) reduce the freedom of parents to teach their children about morality through legislation that would begin indoctrinating children in Kindergarten with “sex education”.
Furthermore, should Obama be elected, he will be the one to select nominees to the Supreme Court. If the Congress stays Democratic (likely), then there will be no stopping the appointment of Supreme Court justices who will legislate from the bench; that is, the new justices will be of the school of thought that the US Constitution is a “living document” that doesn’t mean what its authors wrote, but rather whatever a majority of the 9 Supremes de jour believe in.
Furthermore, Obama is woefully naïve, at best, about the Middle East. His infamous intent to meet “without pre-conditions” with the leader of Iran (who makes threats about the existence of Israel) was even criticized by Biden in the presidential primaries; now Biden the VP has denied that Obama said this.
And then there are the radical "alliances" Obama has that Thomas Sowell discusses:
http://townhall.com/columnists/ThomasSowell/2008/10/07/the_real_obama
Can the American electorate be so silly as to vote to radically reduce their political, economic, religious, and personal freedoms? It is impossible for me to believe at this point. There are about 3 weeks left and with each passing day more people are learning more of this; the truth will out in the end.
Posted by: indiana jim at Oct 14, 2008 4:31:55 PM
"Can the American electorate be so silly as to vote to radically reduce their political, economic, religious, and personal freedoms?"
Whoa, boy - someone apparently hasn't heard about the Republican tenets of the Patriot Act, a *completely new* enthusiasm for torture, the yellow journalism as practiced by the GOP, and a Supreme Court which, if you wingnuts had your way would be dictating to women what they can/cannot do with their bodies.
Yes, we've enjoyed "freedom" of the highest order these past 8 years.
We tried your little experiment and it sucked. Big time.
Posted by: meter at Oct 14, 2008 4:55:37 PM
Tax credit isn't a tax break. Although it may be different for corporate taxes, in personal taxes it counts as paid taxes, and can allow people to get more than they paid in. This sounds like corporate welfare to me.
Posted by: Jorge Landivar at Oct 14, 2008 5:54:25 PM
Can the American electorate be so silly as to vote to radically reduce their political, economic, religious, and personal freedoms?
Because Bush holding people indefinitely without trial and torturing them isn't an assault on our most basic freedoms? The expansion of executive power under Bush is the largest threat to American freedoms, and I feel McCain would continue the same policies.
5) reduce the freedom of parents to teach their children about morality through legislation that would begin indoctrinating children in Kindergarten with “sex education”.
Because teaching Kindergartners how to identify when they are being molested by child predators is such a bad thing. Unless of course, you are a child predator. Parents also can pull their children from sex education classes (at least they did when I was in school) or home school their kids. Or send them to private schools more in line with their beliefs.
We tried the Republican experiment for 6-years and we got two wars to the cost of a trillion and counting, and an economic crisis the scope we haven't seen since the Great Depression. We increased the national debt from $5T to $10+T and counting.
Posted by: JordanT at Oct 14, 2008 6:47:36 PM
The whole reason that 401k's & IRA's are tax-advantaged is to encourage saving & investment. #2 makes no sense. That is, unless, you want people to save less for retirement and be more dependent on government ...
Posted by: GU at Oct 14, 2008 6:48:21 PM
I think the reality is going to be much worse. I think unemployment at 9-10% is quite likely by next summer. If that happens, the financial hole of the banks gets much, much deeper. We may well see the deficit run in fiscal year 2010 to be in excess of 1 trillion dollars. If we really do go down the road of subsidizing state and local governments, that deficit may explode to 2 trillion- politically speaking, it will be impossible to subsidize CA and MA without do the same for OH, PA, MI etc.
Posted by: Yancey Ward at Oct 14, 2008 6:56:58 PM
allow savers with tax-favored Individual Retirement Accounts and 401(k)’s to withdraw 15 percent of those retirement savings, up to a maximum of $10,000, without paying a tax penalty as the law currently requires for withdrawals before age 59 and a half
Doesn't this discourage savings and encourage spending? #4 encourages the states to keep spending and this one encourages the public to withdraw and spend.
Is it too late to nominate Dave Ramsey on either ticket?
Posted by: K T Cat at Oct 14, 2008 7:01:09 PM
If we really do go down the road of subsidizing state and local governments, that deficit may explode to 2 trillion- politically speaking, it will be impossible to subsidize CA and MA without do the same for OH, PA, MI etc.
You'd certainly expect him to prop up the swing states and the ones where his senatorial comrades might be in electoral trouble. Those are some pretty big holes to fill with dollar bills.
Posted by: K T Cat at Oct 14, 2008 7:03:18 PM
For all those commenting on #2 are you sure that the tax itself is being waved as opposed to the penalty for early withdrawl. If only the penalty is waived (which I am thinking would be the case) then it doesn't really operate any differently from existing ROTH IRAs where you can withdrawl principle because you've already paid taxes - other than in this case you are choosing to withdraw the money and pay taxes after the investment instead of before. My question would be: could you then put that $10,000 back at some later date? If no then the incentives issues is diminished since (ideally) only those who need the cash immediately would take it out. However, given bankruptcy law I would imagine that would be insane since 401(k)/IRA is shielded money (I think...)
Posted by: David J at Oct 14, 2008 7:16:53 PM
Proposal #1 seems perfectly reasonable to me. You don't get a credit for hiring that isn't above the current level, so the turnover argument made above seems wrong. However, I doubt that a $3000 credit is a good enough reason to hire another worker in a serious recession, so it probably wouldn't accomplish much.
#2 is just a elimination of the penalty, not of the tax. It is still a bad idea, because although we might want more countercyclical spending, we actually need people to save more, not less, and this is going the other way.
#3 is a very bad idea. Some method of slowing down foreclosures might be OK, but this isn't a good way.
#4 is pointless. If you want to maintain state and local spending, which is probably a good idea for the next year or two, you need to give them money, not lend it to them.
I support Obama, but these aren't particularly good proposals.
Posted by: matt wilbert at Oct 14, 2008 7:46:12 PM
