President Obama is going to announce a sweeping set of new tax cuts aimed at jumpstarting business in the U.S. and attacking the unemployment problem.
But they aren’t going to do anything to stimulate the economy.
Right now, businesses and individuals aren’t interested in spending money. This isn’t because they find the situation in Washington unsettling, as some have suggested, but rather because they are too-deeply in debt themselves and want to start getting out.
The situation businesses say they are in, loaded with cash ready to spend, is not the reality. Instead, many businesses have assets that have fallen in value, even while liabilities have remained stagnant. Notably, real estate is at the core of this problem. And businesses certainly aren’t interested in telling the market they have serious debt worries.
So instead of spending excess capital or record profits on new investment or new purchases, companies are paying down debt to clean up their positions.
This means that any tax cuts for new investment may hardly be used. Businesses aren’t suddenly going to invest more money, when they are more concerned about their own balance sheets and those of potential consumers of their goods. And even if they do, their spending is liable to be more of a “cash for clunkers” scenario than something that can help the real economy.
The same goes for any proposed maintenance of the Bush Tax cuts, which would just be pocketed or used to pay down debts on underwater mortgages by consumers. And, in some cases, those who may even be in good financial shape may elect to save money as their confidence is so low in the future of the economy.
That means all that stimulus cash, in the form of tax rebates, will likely not go back into the real economy or create more jobs.
But there is a bright spot: All that cash WILL help companies and people pay down debt, which will help to drive the economy out of this deleveraging period at a faster rate. But it’s going to take time.
The only entity that can spend right now to create a large amount of jobs right now is the U.S. government, and its $50 billion stimulus package not only falls short, but looks likely to fail.
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