BUSINESS

Obama's Latest Stimulus Plan Gets Panned By Krugman

09/07/2010 12:29 pm ET | Updated May 25, 2011

In a speech in Cleveland tomorrow, President Obama will propose an economic stimulus plan that would allow businesses to deduct immediately the entire cost of new equipment from taxes, instead of having to deduct it over the course of up to 20 years, as is the case now. The tax credit is the latest plan to revive the sputtering economy and to prove to critics that the president supports business -- but some are skeptical about whether it can work.

The New York Times's Paul Krugman isn't so sure it's a good idea to put more money in companies' hands, arguing that an increase in public works spending might actually do more to help the economy. Obama's plan includes $50 billion to spend on infrastructure, a figure that Krugman thinks is paltry.

If the president's proposal is in part a political stratagem, Krugman says he should make it bolder. Indeed, with midterm elections approaching, Congress would effectively have only three weeks to pass the legislation before lawmakers begin campaigning, and before the balance of power could shift significantly: The plan might be doomed from the start.

If passed, though, the tax credit would allow businesses to write off eligible expenses right away, rather than in annual increments, effectively giving them their money sooner than they currently can get it. The program would take a big toll on government coffers initially -- $200 billion -- in the first two years. But after a decade, since tax breaks would have already been doled out, that cost would even out to a more palatable $30 billion. Equipment investments made starting tomorrow, regardless of when the program passes, would be eligible. "Temporary investment incentives like this can have big effects because they really pull investment forward," Columbia University business school dean R. Glenn Hubbard said.

But again, it remains unclear whether that would actually help. As the Wall Street Journal points out, businesses mostly aren't taking advantage of the ultra-cheap loans currently available from banks. And, says Politico, without consumer demand, there's no reason for them to invest in new equipment.

The president's critics say he's missed the point -- namely, the issue of extending the Bush tax cuts. "If this will be offered as a tradeoff for raising the top two rates, it's a non-starter," Jade West, senior vice president of the National Association of Wholesaler-Distributors, said.

Still, the president believes his proposal will have a broad appeal. "It's a plan that history tells us can and should attract bipartisan support," he said.

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