Barack Obama: $400 Billion in Major New Investments in America

I think that by now you all caught yesterday's Labor Fest speech by President Obama.  The President was fired up (if you haven't watched the speech yet, by the way, follow the link and you can see the video), and so was the crowd.  But the President didn't go there just to rally the troops.  He proposed an important new investment in the nation's infrastructure: $50 billion in new federal infrastructure spending.

Alongside it, the Obama administration is proposing two more economic investment measures: a $100 billion incentive for research and development by increasing extending the R&D tax credit permanently, and a $200 billion plan to let businesses write off all capital investments.  Of course, Democrats and the President are still pushing for the small business jobs bill that the Republicans have been blocking in the Senate, with $30 billion in loan guarantees and $12 billion in tax cuts for small business.

Put them all together, and the Obama administration is front-loading a near-$400 billion investment in America's economy and jobs.  Let's go through these investments one by one.

$50 billion in new infrastructure spending

We heard about this the President's speech yesterday.  As Rachel Maddow noted in June, the American Recovery and Reinvestment Act allocated $100 billion in infrastructure spending, the largest since Eisenhower and the building of the highways.  And now, the President is proposing something ingenious: creating an infrastructure bank, run by the government, that would leverage $50 billion in taxpayer investment with a multiple-fold private investment.  It would also set national priorities in infrastructure instead of funding it the old way: earmarks by powerful members of Congress.
The President proposes to fund a permanent infrastructure bank. This bank would leverage private and state and local capital to invest in projects that are most critical to our economic progress. This marks an important departure from the federal government’s traditional way of spending on infrastructure through earmarks and formula-based grants that are allocated more by geography and politics than demonstrated value. Instead, the Bank will base its investment decisions on clear analytical measures of performance, competing projects against each other to determine which will produce the greatest return for American taxpayers.
The spending would fund the three R's of infrastructure to begin with: Roads, rail and runways.
ROADS: Rebuild 150,000 miles of roads – renewing our commitment to the backbone of our transportation system;

RAILWAYS: Construct and maintain 4,000 miles of rail – enough to go coast-to-coast;

RUNWAYS: Rehabilitate or reconstruct 150 miles of runway – while putting in place a NextGen system that will reduce travel time and delays.
Not only is a 21st century infrastructure critical to our nation's future, it will create good paying jobs for Americans who need work now.  Progressive economists have hailed infrastructure spending as a great way to rebuild the economy.

Republicans, of course, are already opposing this plan.  John Boehner does not want us to rebuild America.  He'd much rather spend it giving trust fund babies their inheritance tax-free.

$100 billion to expand and make permanent the R&D tax credit: leading in new technologies and protecting American jobs.

The President's proposal - to be unveiled tomorrow - extends the research and development tax credit for American businesses from 14% to 17% and makes it permanent.  The Washington Post reports that it will be paid for by closing other corporate tax loopholes.
The business proposal - what one aide called a key part of a limited economic package -- would increase and permanently extend research and development tax credits for businesses, rewarding companies that develop new technologies domestically and preserve American jobs.

It would be paid for by closing other corporate tax loopholes, said the official, speaking on condition of anonymity because the policy has not yet been unveiled.
What's more, Research and Development tax credits are highly productive for the economy, spurring a two-fold increase in spending by businesses for every federal dollar spent. Robert Atkinson, the President and Founder of the Information Technology and Innovation Foundation and the former Vice President of the Progressive Policy Institute explains:
Whatever its flaws, Atkinson said extensive economic research shows the credit works. His own group estimates that the credit spurs about $2 in private research and development spending for every dollar it costs the government, and about 70 percent of the spending goes to paying workers, making it an effective job creation tool. Noting that the U.S. has one of the highest corporate tax rates in the world, 35 percent, Atkinson said: "It's pretty clear we need to do something about our corporate taxes if we want to remain competitive," and he said expanding the R&D credit is one way to lower the tax burden on businesses. "Other countries wake up every morning asking how they can win this fight. We do not."
Let me re-iterate that: every dollar in federal spending in the R&D tax credit results in $2 in private spending, and 70% of that spending goes to create good paying American jobs.  That means for every dollar the federal government spends on this tax credit, not only does it help continue critical research and development in areas like information technology and green energy, but it also creates $1.40 of income for an American worker.  Make that tax credit permanent right now!

$200 billion in capital investment tax credit for businesses.

The US economy saw a robust growth in capital investment spending (which is a fancy term for businesses buying equipment and software) in the second quarter of 2010.  In that period, it was up 21.9% from this year's first quarter.  This is the best such gain in more than a decade:
Meanwhile, the annual rate of business spending on equipment and software in the second quarter was up 21.9% from the first quarter, the biggest increase in more than a decade, after plunging at annual rates of as much as 32% in 2008 and early 2009. Such spending accounted for the lion's share of the economy's modest 2.4% growth in the second quarter.
This was possible because of the large amounts of cash corporations have been hording for the past year or so, when they were reluctant to spend it due to the credit crunch.  At least for them, credit seems to have eased, and they have put that cash-on-hand to use purchasing new equipment and replace old ones.  This is a very encouraging sign for several reasons.  First, capital investment spending is typically followed by a boost in hiring by the companies who are making those investments.  When companies buy new machinery and equipments, they need employees to handle them.  The previously cited USA Today report brings optimistic news.
[Barclays Capital Chief Economist Dean] Maki says job growth — spurred by capital spending and falling productivity growth as companies can no longer wring more work out of exisiting employees — will reach about 200,000 a month by early 2011.
There is of course also a secondary effect from capital spending that goes beyond just the firms doing the spending.  The firms making those equipments (often small businesses) see rising sales and a greater demand for their products, and hire more workers as the need for production increases.  The good news is that companies seem to be willing to continue this trend.
In a late July survey of 400 large and midsize companies by The Corporate Executive Board, 51% said they plan to increase capital spending the next 12 months, up from 39% in the fourth quarter.
The not-so-good news is that more recent data shows that they could use a push in the form of tax incentives to continue that spending, as capital spending seems to have gotten off to a rocky start in the current quarter that began in July, falling 8% (month-over-month).

Boosting that investment spending is in the interest of the American economy.  Incentivizng that spending by letting companies deduct from their taxes the cost of capital purchases up front, as President Obama is proposing, would help boost it.  It's a front-loaded proposal with an up-front 2-year cost of $200 billion, but as the Times notes, businesses would end up taking the deductions over time anyway in the form of depreciation of equipment.
The upfront deduction would allow businesses of all sizes to keep more money now and would give large corporations, many of which are sitting on cash because of uncertainty about the economy, an incentive to spend and invest.

It would cost an estimated $200 billion in revenues, though the ultimate net loss would be $30 billion over 10 years, administration officials say, since businesses would eventually deduct the depreciated value of the equipment in any case.
Small business jobs bill.

There's not much more to say on it except to reiterate what we know.  The Republicans in the Senate are blocking a small business jobs bill that helps in two parts:
  • $30 billion in loan guarantees through small community banks that serve local small businesses.
  • $12 billion in direct tax breaks for small businesses.

Small businesses is the engine of growth and job creation in the American economy.  There is no if's and's or but's about it.  Small business creates 64% of America's new jobs.  They need help to innovate and hire new people, and Democrats and President Obama want to give it to them.

This is our choice.

One can argue that the above list contains too much help for business.  It does contain a lot of help for business, but targeted help for them to do things the economy needs to jump start itself.  All of this investment is ultimately investments in American jobs and the American economy.  We have a private economy, and for us to rebound, we are going to need those targeted help for the private sector, which are far from broad-brush right wing approach of "cut the corporate tax rate and give them money to move jobs offshore."

No one will deny that the American economy is on a difficult path.  But indications point to that difficult path being a path forward.  We can choose to keep moving forward on it, or we can, as President Obama says, hand the keys back to the Republicans this November.  If they get back in power in Congress, you can forget about investing in America's infrastructure and creating jobs.  You can forget about helping community banks or small businesses and creating jobs.  You can forget about critical investment in research and development to keep America on the cutting edge and to create jobs.  You can forget about incentivizing investments in equipment and software and creating jobs.

In other words, if the Republicans regain power, you can forget about creating jobs, and you can forget about making any progress.  We progressives and liberals have a choice to make.  We can choose to stay on a difficult path forward and elect Democrats, or we can choose to lay down and let the Republicans take over.  Let's make the choice to keep moving us forward.