Obama's Massive Tax Cuts

This post first appeared on Minyanville.

As Inauguration day nears, details of President-Elect Barack Obama’s huge economic stimulus package are emerging. In today's meeting with Congressional Democrats, Obama begins to lay out his vision for reviving the nation’s catatonic economy.

According to the Wall Street Journal, around 40% of what could be an almost $800 billion plan may come in the form of tax cuts. Rather than mailing rebate checks, as the Bush administration did last summer -- which by most accounts did little to boost real economic activity -- Obama wants to reduce tax withholdings to get more cash into the hands of middle-class workers with every paycheck.

The plan also calls for the widening of so-called “tax look-backs,” which allow companies to apply today's losses to future tax bills. The new proposal would let firms book losses against past tax payments, freeing up money for the current tax period.

To encourage businesses to buy new machines, factories and make other capital investments, Obama is considering allowing newly purchased assets to be more quickly depreciated. Along with tax breaks for hiring new workers and delaying layoffs, the new administration wants to discourage downsizing and prevent firms from delaying expansion plans.

These and other tax-specific initiatives would come on top of previously announced plans for heavy infrastructure investment. When news of the impending stimulus package began to trickle out toward the end of 2008, peddlers of all things metallic enjoyed a strong bounce into year-end.

Freeport McMoRan (FCX), the world's second-largest copper producer, is up almost 100% from its December lows, Nucor (NUE), America's largest steelmaker has bounced more than 90% since November and US Steel (X) is approaching levels not seen since last October. Still, these and other commodity-centric firms are well off highs seen just last summer.

Ultimately, dollars earmarked for businesses and consumers alike are being sent out with a single mission: To be spent. With consumer and business spending making up almost 85% of gross domestic product, it’s no wonder politicians are urging Americans to part with their precious pennies for the greater good.

As the sage Mr. Practical reminded us this morning, however, the true path to economic recovery is through saving, not spending. With each dollar the Federal Reserve prints to finance this massive deficit-spending program, our paychecks -- though they may be increasing in size -- are worth less every month.

Economic stimulus is all well and good, but handing out a currency that’s constantly being debased is akin to tires spinning in the mud: With each rotation, they just bury themselves deeper, and the task of unburying gets longer, more difficult, and infinitely dirtier.