Cross-posted from New Deal 2.0.

Electoral disaster has a way of focusing the mind. Perhaps this is the best way to explain President Obama's latest initiatives: an investment in the nation's roads, railways and runways that would cost at least $50 billion, along with a permanent extension of the research and development tax allowance, which represents a further $200 billion in tax breaks for businesses.

All well and good, although it remains to be seen whether Obama's journey represents a genuine conversion on the road to Damascus, or another detour into a fiscal cul de sac of the kind that has long characterized his Presidency.

Sure every little bit helps, but if the $787 billion package introduced in March 2009 wasn't sufficient to bring unemployment down, is $50 billion more in infrastructure spending really going to make up the difference? As for the R&D and bonus depreciation tax credits: nice cosmetic gestures to a business community that is coming to view this President as "anti-business", but it's fundamentally a supply-side measure to address a weak economy characterized by lack of demand. It remains the case that firms will only borrow, produce, invest, and employ now if they feel they will be able to sell the output in the future. They're reluctant in the absence of robust consumption, not investment.

Much like his approach to the banking system, Obama continues to practice stimulus from the top down rather than bottom up. His administration needs to restore income growth among households, not businesses, to mitigate the need to for families to resort to borrowing and the continuation of negative saving trends (that is, household deficit spending). If tax cuts are to be implemented, far better to introduce them to assist non-financial institutions, whose dire financial situation is at the heart of the crisis.

The US labor market remains locked into a situation where the tepid employment growth barely absorbs new entrants and the most disadvantaged workers are trapped in long-term unemployment. In this state, we get what the institutional labor economists, such as Professor Bill Mitchell, call "bumping down". What "bumping down" means is that when there is an overall shortage of jobs, higher-skilled (more educated) workers tend to take jobs that were previously occupied by lower-skilled workers. The low-skilled are then forced out into the unemployment queue. So there are two inefficiencies: (a) the skills-based underemployment; and (b) the unemployment.

Which means a bigger stimulus number is required. Politically, that's a tough sale right now, no question. But in order to make that case, the President must first challenge the canard that last year's stimulus package was wasted because unemployment still remains stubbornly high.


On May 25th of this year, the US Congressional Budget Office released a detailed study: Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2010 Through March 2010. The CBO suggests that "nearly 700,000 FTE jobs during the first quarter of 2010â