Analyzing Barack Obama's Four Point Economic Plan

Barack Obama presented his four point economic plan today to jump start the economy. Let's take each of the points one at a time.

1)

To fuel the real engine of job creation in this country, I’ve also proposed eliminating all capital gains taxes on investments in small businesses and start-up companies, and I’ve proposed an additional tax incentive through next year to encourage new small business investment. It is time to protect the jobs we have and to create the jobs of tomorrow by unlocking the drive, and ingenuity, and innovation of the American people. And we should fast track the loan guarantees we passed for our auto industry and provide more as needed so that they can build the energy-efficient cars America needs to end our dependence on foreign oil.

I am for any decrease in capital gains tax because that is one of a plethora of pernicious and unfair taxes that only go to double and triple tax Americans. Still, there are several flaws with this proposal. While Obama proposes a capital gains cut for new small businesses and other start ups, he will at the same time raise the capital gains tax on other businesses and wealthy individuals. The economy won't merely jump start by all sorts of new businesses entering the market place. In fact the overwhelming majority of new businesses fail. The economy gets jump started if all businesses invest more. By raising the capital gains on some while cutting it on others, all he is doing is redistributing where capital is invested. Furthermore, new businesses rarely have any capital gains. That's because a capital gain is on the sale of a long term asset. New businesses have no long term assets, hence the word new. A capital gain is realized after holding something at least a year. Eliminating the capital gain only on start ups is entirely ceremonial.

2)

The second part of my rescue plan is to provide immediate relief to families who are watching their paycheck shrink and their jobs and life savings disappear. I’ve already proposed a middle-class tax cut for 95% of workers and their families, but today I’m calling on Congress to pass a plan so that the IRS will mail out the first round of those tax cuts as soon as possible. We should also extend and expand unemployment benefits to those Americans who have lost their jobs and are having a harder time finding new ones in this weak economy. And we should stop making them pay taxes on those unemployment insurance benefits as well.

With this portion of the plan, Senator Obama simply doesn't realize the potential problem looming as a result of the massive bailout. This massive bailout can easily force our economy into a period of deep inflation. What we need now is massive cuts in spending. Instead, he wants the federal government, right after it spends $750 billion to bailout Wall Street, to reach further into its pockets for a stimulus check. Furthermore, we need people working. Yet, Senator Obama wants to provide extra benefits for those that don't work. What does he think his stimulus check and extension of unemployment benefits will motivate people to do?

Senator Obama goes on with part two.

I welcome Senator McCain’s proposal to waive the rules that currently force our seniors to withdraw from their 401(k)s even when the market is bad. I think that’s a good idea, but I think we need to do even more. Since so many Americans will be struggling to pay the bills over the next year, I propose that we allow every family to withdraw up to 15% from their IRA or 401(k) – up to a maximum of $10,000 – without any fine or penalty throughout 2009. This will help families get through this crisis without being forced to make painful choices like selling their homes or not sending their kids to college.

I actually proposed something similar however in my proposal the money could only be used to put a down payment on a house. This also has a potentially devastating effect. If everyone is allowed to remove from their 401ks and IRA's for anything, then what that will do is drain the assets of the very financial institutions that are themselves drowning in debt. My proposal would have a similar potential, however in my proposal, that money would go strictly toward stabilizing the housing market, which these firms need to recover. In Senator Obama's proposal, money these firms never thought could be removed will be removed wholesale. That would be another devastating blow to their bottom line at just the time when they are struggling. Senator Obama's proposal would guarantee that the $750 billion bailout would be a totally worthless endeavor. That's because most of these firms would clean up their mortgage portfolio only to watch their investment portfolios dwindle.

3)

The third part of my rescue plan is to provide relief for homeowners who are watching their home values decline while their property taxes go up. Earlier this year I pushed for legislation that would help homeowners stay in their homes by working to modify their mortgages. When Secretary Paulson proposed his original financial rescue plan it included nothing for homeowners. When Senator McCain was silent on the issue, I insisted that it include protections for homeowners. Now the Treasury must use the authority its been granted and move aggressively to help people avoid foreclosure and stay in their homes. We don’t need a new law or a new $300 billion giveaway to banks like Senator McCain has proposed, we just need to act quickly and decisively.

There is little difference between loan modifications and what Senator McCain has proposed, and furthermore, we need no further act of any politician to begin loan modifications. They are already occurring as we speak. The problem is that keeping these folks in their homes, by force, is the exact opposite of what needs to happen. These folks got into the market through bad loans. They need to be removed from the market as quickly as possible, not propped up to remain in the market through government intervention.

4)

Finally, this crisis has taught us that we cannot have a sound economy with a dysfunctional financial system. We passed a financial rescue plan that has the promise to help stabilize the financial system, but only if we act quickly, effectively and aggressively. The Treasury Department must move quickly with their plan to put more money into struggling banks so they have enough to lend, and they should do it in a way that protects taxpayers instead of enriching CEOs. There was a report yesterday that some financial institutions participating in this rescue plan are still trying to avoid restraints on CEO pay. That’s not just wrong, it’s an outrage to every American whose tax dollars have been put at risk. No major investor would ever make an investment if they didn’t think the corporation was being prudent and responsible, and we shouldn’t expect taxpayers to think any differently. We should also be prepared to extend broader guarantees if it becomes necessary to stabilize our financial system.

I also believe that Treasury should not limit itself to purchasing mortgage-backed securities – it should help unfreeze markets for individual mortgages, student loans, car loans, and credit card loans.. And I think we need to do even more to make loans available in two very important areas of our economy: small businesses and communities.

On Friday, I proposed Small Business Rescue Plan that would create an emergency lending fund to lend money directly to small businesses that need cash for their payroll or to buy inventory. It’s what we did after 9/11, and it allowed us to get low-cost loans out to tens of thousands of small businesses. We’ll also make it easier for private lenders to make small business loans by expanding the Small Business Administration’s loan guarantee program. By temporarily eliminating fees for borrowers and lenders, we can unlock the credit that small firms need to pay their workers and keep their doors open. And today, I’m also proposing that we maintain the ability of states and local communities that are struggling to maintain basic services without raising taxes to continue to get the credit they need.

Normally, I wouldn't mind direct small business loans, however, once again, Senator Obama is totally oblivious to the serious danger on the horizon of out of control spending. We are now going to take on $750 billion in toxic Mortgage Backed Securities, but that isn't enough for him. We should now move to take on billions more in small business loans. At what point is government intervention into the markets enough?

For analysis of McCain's economic stimulus proposal take a look at this link.