Gridlock is Good
Research for Online Investors

by John Dalt

9/8/10

President Obama is facing the unpleasant future of a congress controlled by the opposing party.  This will make it impossible for him to push through more socialist programs.  It will also give him the perfect “enemy” to lay all the blame for his failures at their feet.  The good news for business is “gridlock is good.”

Oh! Bama has proposed allowing business to write off capital expenditures.  This little gem is finally a recognition that giving money to consumers didn’t restart the economy.  We wrote about this on October 10, 2009 in More Stimulus, Less Growth.

Basic economics dictates encouraging business to buy capital goods with tax credits. Capital goods purchasing moves inventory, and brings manufacturing jobs back to the economy. From this springboard, the economy will recover. You cannot build an economy on consumers, or retail, manufacturing of capital goods fuels growth . This would be a bitter pill to swallow, but sooner or later the present “five year plans” will fail, just as they did in the Soviet Union.

The fact that Oh! Bama is starting to realize the importance of encouraging business demand with favorable tax policy (not consumer demand with stimulus money) should not be lost on us.  Realism sets in!  Peter Orzag, former White House Budget Director, wrote in the New York Times that congress should “extend (all) the tax cuts for two years and then end them altogether.”

Alas, his latest proposal to allow business deductions for capital goods is larded with other silly ideas.  Like building 150,000 miles of roads and 1,500 miles of runways.  Add in the usual democratic nod to high-speed rail, and it seems not much has changed.  These proposals are payoffs (again) to labor unions.  Shortly after the president’s inauguration, he signed Executive Order #13502 that forces contractors on large public construction projects to submit to union representation for employees.  The president is quick to point out that all of the $50 billion cost is paid for under his plan, he wants to hike taxes on oil and gas companies.  That ought to work, raise taxes on energy companies.  We expect one of two results; explore for oil overseas and raise the price of energy sold in America.

Just when you think there is hope, it is dashed away by the realism that nothing has changed.  Another Oh! Bama proposal is to make the Research and Development tax credit permanent.  This sounds great, but one has to realize it is a payoff to Silicon Valley.  All the better to buy them off as they become restless with the democratic party, and Oh! Bama in particular.

The R&D tax credit has been around for awhile, but has always been temporary, kind of like the doctor’s fix in Medicare.  Congress likes these kind of tax programs that require annual action, all the better to reap political contributions when the tax hammer is about to fall.

Be wary of the president’s proposals, as he is like a man in a paper bag.  The administration appears to be flailing away for a ‘breakout’ proposal that will capture the public’s imagination, rather than making sound fiscal policy.  What they are really engaged in is political theater, With two months left until the fall elections, the mainstream media needs a story line that paints the republicans as obstructionists, flip-floppers, and against the ‘little guy.’

The president is going to speak this afternoon, and I am sure he will extol the wonderful “investments” he is proposing.  Be careful.  Government does not invest.  Government takes money out of the economy and consumes.  As Murray Rothbard wrote in America’s Great Depression, “There can be no such investment…since government has seized funds from private individuals…their spending is therefore pure consumption.” I have edited this quote heavily, but the truth is absolute. The next time you hear a pol talk about 'investment' (from either party), fire him.

To the mailbag:
Why can't Otellini (INTC) and others hire any of the Americans coming out of the U.S. colleges?  Why must they only hire the U.S. college educated foreigners?  Sounds like Otellini is putting a poor me out there on Large Businesses.  Hire an American Graduate!—paid up subscriber T.M.

John’s reply:  I think you would be shocked at the ethnicity of students in our nation’s engineering schools.  The course work is rigorous.  Quite honestly, it seems American society, and college students, have lost the willingness to pursue excellence.  Blame parents and local K-12 schools that don’t have science fairs, but have sports programs for every interest.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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