I witnessed the President's speech with much anticipation, hoping that maybe I'd hear something that would convince me that the nation would be on the right track and our current economy will soon recover and people will have jobs. The President proposed a $447 billion jobs plan to Congress.
That's a big number, and if spent on the right things it could actually get us out of this zombie-like economy. Unfortunately, after listening for over 40 minutes and digesting the details, I find that we are marginally better off even if everything the President proposes actually get passed by Congress.
$240 billion is for payroll tax credits for various types of hiring. If an employer hire someones, the employer gets some tax credits and the employee gets some tax credits. Are we missing the point here? The issue with companies all over is with demand or lack thereof. If I were running a company and I can't sell my products and/or services, would I go and hire more people just because I am getting some tax credit for hiring? Of course not. And if I don't have demand, would I hire a person who has been out of work for over six months because I will get a tax credit of $4,000? Of course not.
Compounding the issue, the tax credit is only for next year. Even if I want to consider hiring people but am uncertain about my business, would I go and hire someone for only a one-year tax credit? Of course not. Many businesses plan for three or more years. One year has little effect on my business planning.
Another part of the plan is the tax credit of $1,500 to the typical working family. The reasoning here is that if people have more money, they will spend more. In the tough economic environment of the last few years, this line of reasoning hasn't held true. People spend only on necessities and spend on discretionary items when they feel good about their prospects. Right now, in general, people don't feel confident about the future. The ones on the margin will likely save the $1,500 rather than spend it. The impact on demand from this credit is questionable at best. Furthermore, this is a one-time credit. It may give a short boost but nothing more; then we are right back to where we are today with lack of demand.
The issue is with lack of demand, which is contributing to the dismal jobs picture we face. Tax credits towards hiring and one-time tax credits for families will not generate demand. The money could be better spent in the form of massive federal stimulus on projects that will put people back to work. That's what we need to turn our economy around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.