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The Trouble with More Tax Cuts

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Stimulus plan misses the point: We can't spend our way out of this.

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The Senate approved a stimulus bill of about $838 billion on Tuesday, with the 61-to-37 vote largely falling along party lines.

Until the bitter end, bickering was the order of the day: New York's Chuck Schumer called on Republicans to acknowledge that the country was in crisis and "that they actually lost the election." Only 3 Republicans voted for the bill, which was crucial to its passage: Arlen Specter of Pennsylvania, and Olympia Snowe and Susan Collins of Maine.

"The plan is not perfect," President Obama said in a televised speech on Monday night. "No plan is. I can't tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis."

The Senate bill, unlike the $819 billion bill the House passed on January 28 (without a single Republican vote in favor), is tilted more heavily toward tax cuts. It also slashes assistance to state and local governments, which are being forced to cut employees and programs to balance their budgets. The Senate's version cuts $40 billion from a $79 billion state fiscal-stabilization fund proposed by the House. It also establishes a weaker safety net at this critical time by offering less money for unemployment insurance, food stamps, and retraining programs.

According to the Center for American Progress, the Senate bill "provides for 12 to 15% fewer jobs created or saved" than the House-passed bill, despite costing more. "The House-passed legislation creates or saves between 430,000 and 538,000 more jobs than the Senate compromise."

During Senate deliberations, 36 Republican senators voted for the DeMint amendment, which would have replaced the $800 billion stimulus with $3.1 trillion in tax cuts. Most economists argue tax cuts provide little stimulative effect; considering the efficacy of President Bush's massive tax cuts, this, to me, reeks of hypocrisy and delusion.

What our legislators fail, or refuse, to recognize is that this recession has exposed the profound fundamental weakness in the American economy. We are a debtor nation whose growth for many decades has revolved around cheap credit and consumerism - 70% of our economy is currently based on consumption. (Germany, by comparison, is at 50%.) Our health-care system, schools, infrastructure and energy grid are crumbling. At a time when more people desire public transportation than have in decades, cities are forced to scale back service.

This stimulus bill, as it currently stands, offers little radical change. For the last 2 decades, there's been minimal job growth in the private sector -- though the size of government has doubled -- fueled almost exclusively by financial engineering and jobs from housing construction. At the same time, consumer debt has doubled.

The shortsighted tax-cut mantra of many in the Senate assumes that Americans must start spending again to "save" the economy. Except that's how we got into this mess: excessive leverage and reckless spending. Sadly, politicians don't have the stomach to make Americans take their medicine.

I think America needs to radically overhaul its economy; as a start, we should be modernizing an infrastructure and public-transportation system that some Third World countries would be ashamed to claim as their own. Railways, subways and buses have been neglected for too long in our auto-centric country. In suburban and exurban boom states like Florida, Nevada and California, such programs are being left to die.

On the campaign trail, Obama suggested about $200 billion for infrastructure was needed to start; as a result, investors bid up the stocks of domestic infrastructure companies like Aecom (ACM), Granite Construction (GVA), and LB Foster (FSTR). Instead, the Senate stimulus bill includes just one-tenth of that money -- about $27 billion for highways and $8.4 billion for public transit. Infrastructure companies wouldn't benefit much from the bill as it currently stands, nor would manufacturers of rail or subway cars. Their stocks are currently trading lower.

One company that should benefit -- as ever -- is Google (GOOG). Both the Senate and the House are proposing about $20 billion for a "smart grid" power network; Google entered this space on Tuesday with the Google PowerMeter, which people can use to track electricity use in their homes or businesses.

While banks led us into this disaster, innovative companies like Google will hopefully lead us out.
No positions in stocks mentioned.

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