Busch: Delayed Stimulus, But Where's It Going?

As Congress comes back from vacation and starts a new session with new members, the first task is the stimulus plan. While President-elect Obama had hoped for a bill to sign by his inauguration, the political wheels are unable to spin fast enough to produce a document until mid-February.

According to Politico's Carrie Brown, "Obama and Democratic leaders had hoped to pass a bill in time for Obama to sign after his swearing-in Jan. 20 – but political and fiscal reality intruded, amid objections by Republicans and even some Democrats to rushing through a plan that could cost $775 billion."

The details are still getting worked out, but here are the major components of what is currently being debated:

1. $300 billion is headed towards tax cuts for individuals and for business.

2. The largest piece of tax relief in the new plan would involve cuts for people who pay income taxes or who claim the earned-income credit, a refund designed to lessen the impact of payroll taxes on low- and moderate-income workers. Checks will be sent out and this will stimulate in a similar fashion as Bush's last tax cut. Bush's tax cut in April/May failed as consumers believed it was a one time deal. Obama wants to wants to make the changes permanent to change consumers behavior to get them to spend the money. It won't work.

3. The biggest part of the business tax cuts would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. This would accelerate forward the tax cuts and provide money directly into the companies for 2009. The 2nd part of this would allow companies to this tax money back into new investment as it makes these write-offs retroactive to January 1st, 2009.

4. The plan would offer a 1 year tax credit for companies making new hires or forgoing layoffs, which could be $40-50 billion. This is by far the best part of the Obama stimulus plan as it's likely the companies will utilize the money more efficiently than expenditures just given out to the states.

5. For the remainder of the $750 or $850 billion in stimulus, we don't have all the information from the states. The goal from the Obama administration was to have "shovel ready" infrastructure projects to pump money into that included roads, bridges, schools, and broadband. $200 billion is expected to go to revenue-starved states to pay for health care programs for the poor and other operating costs. There are also plans to fund projects to advance energy efficiency and to rebuild health care information technology systems.

The hope is that this plan can balance a massive and rapid infusion of economic stimulus with being to create a plan that can stimulate over two years. The political reality was stated by House Democratic leader Nancy Pelosi, "The people's business can't wait."

Obama's plan is to create 3 million new jobs with 600k in the government. While the plan is enormous in scope, it will likely be an enormous waste of resources. It will have a short term positive impact that will last longer due to its size. However, the growth of government will be longer term as well and be a net drag to the economy in the long term.

    • Obama Urges Quick Action On Economic Stimulus Bill

Contrary to what Keynesians believe, history shows that government remains the causation not the solution to economic problems. Watch the CBO estimates for the fiscal deficit this week to see how big the deficit will grow in 2009. The early chatter is the deficit as a share of GDP to 10% or almost double the post WWII record.

While the US dollar rallies at the beginning of the year, the risk for the 2nd half will be this fiscal deficit and the surplus of US dollars from quantitative easing by the Federal Reserve.



Andrew Busch

Andrew B. Busch is Global FX Strategist atBMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor.He can be reached here .