President Barack Obama's new stimulus plan directs government assistance to some of the strongest parts of the economy without solving the biggest problem: finding work for the 14.9 million unemployed.width=398

The three main ideas he plans to introduce on Wednesday -- $50 billion in infrastructure spending plus two sets of business tax incentives -- could provide a modest burst of activity in a slow-growing economy.

The risk is that they succeed only in pulling forward planned investments, which would do little to spur hiring and alter the sluggish growth trajectory.

They could be helpful but are unlikely to have a large effect on growth, said Goldman Sachs economist Jan Hatzius.

Some of the proposed programs cover multiple years, spreading out the potential benefit; others are merely modifications or extensions of old ideas or policies, he said.

The White House hopes the programs will get idled construction workers back on the job and shake loose some of the spare cash held at corporations if it can convince wary lawmakers to go along.

The infrastructure plan -- the most likely of the three proposals to generate a significant number of jobs -- may face a particular fierce challenge in Congress.

Republicans and some deficit-hawk Democrats have repeatedly blocked spending packages for fear of adding to an already large budget gap.

The timing also looks challenging with only about a month left before lawmakers leave to prepare for November elections.


Obama administration officials argue that the United States is grappling with two deficits, budget and jobs, and can't afford to ignore either. The jobless rate hit 9.6 percent last month and is likely to drift higher in the coming months. As long as it remains elevated, demand will be subdued.

But there is reason to doubt whether the business incentives will do much to close the jobs gap.

Tax write-offs for plant and equipment investment may not generate much new activity because there is plenty of unused factory space available. Capacity usage was 7 percentage points below normal as of July, according to Federal Reserve data.

And businesses were busily buying equipment and software even without special tax write-offs. Those categories grew at a 25 percent clip in the more recent quarter, which marked the third consecutive period of double digit growth.

The third idea, research and development tax breaks, is a recycled policy proposal that is normally renewed every year and therefore unlikely to spark a major new wave of investment. And it would likely benefit larger companies far more than the small businesses that remain reluctant to hire.

Obama acknowledges there is no magic policy prescription that can repair the badly damaged job market. But his critics propose a laundry list of ideas including lower payroll taxes, a public works program akin to those of the Great Depression, or perhaps offering older workers early full retirement benefits to help young people get on the job ladder.

Brian Bethune, an economist with IHS Global Insight in Lexington, Massachusetts, said Obama's latest proposals fell short in addressing the needs of small businesses which normally account for the biggest portion of new jobs.

Large businesses, particularly those that export to fast-growing economies such as Brazil, China and India, have fared far better than their smaller counterparts in recent months, and that shows up in their hiring decisions.

The National Federation of Independent Business's monthly employment survey showed small companies remain reluctant to hire. NFIB has said its members are most concerned about sluggish sales, but their worry list also includes taxes, healthcare costs and regulatory reforms.

Companies with fewer than 50 workers employ almost three times as many people as firms with more than 500 employees.


Even if Obama's proposals succeed in encouraging business investment, they may be borrowing from future quarters, much like tax incentives for home buyers that drove a frenzy of activity followed by the steepest sales decline on record.

You just change the timing, Bethune said. That creates distortion and noise in the quarterly pattern of economic activity.

Wall Street seemed unimpressed by the stimulus proposal. Major stock indexes were lower at midday, dragged down by fresh worries about economic growth prospects in Europe.

Andrew Busch, a currency and public policy strategist at BMO Capital Markets in Chicago, said there were big question marks about how Obama intended to pay for them.

If he chooses to take away a corporate tax break to pay for this proposal, the net gain is zero, he said. This is likely why U.S. stocks are not seeing much of a bounce on the news.

(Editing by Andrew Hay)