If we review the last two years, we see variations of assistance provided by the government that not only miss the mark, but also break the legislative Hippocratic Oath of doing no harm. This is the dilemma facing Democrats as they head into the fall elections. They were successful in achieving their legislative goals of a massive stimulus program, a massive re-write of finance and a massive re-write of health care.

The stimulus plan did not achieve its goals. The financial regulatory law needs over 70 studies before regulators can implement the changes. The health care law will take years to fully implement and is already raising costs for consumers and small business.

Aetna Co. BlueCross Blue Shield plans and other smaller carriers have asked for premium increases between 1% and 9% to pay for extra benefits required under the (health care) law, according to the WSJ. “The rate increases largely apply to policies for individuals and small businesses and don’t include people covered by a big employer or Medicare.”

This is the opposite of what small firms need during a period of slow growth. Small firms’ costs are going up for existing employees and this takes away funds available for new employees. While there are many challenges and costs for small business, health care is the fastest rising expense when it comes to employees. The health care law is accelerating these costs.

Steve Forbes writes, “Government policy mistakes bring on crises: the correction of those mistakes will cure them.” The correction to these policy mistakes began yesterday.

While it was encouraging to hear President Obama’s new proposals to help small business, it is unlikely they will be made into law soon. Even if these were implemented tomorrow, they would not likely change hiring in time for the election. However, the hope is that this change of tactic towards helping the job creators will continue in 2011.

For the unemployed, for the economy, for the markets, this would be the best outcome possible.

Over the weekend, President Obama unleashed a fusillade of economic proposals meant to not only raise the nation’s hopes of economic recovery (just around the corner), but also to raise the flagging poll numbers of the Democratic party.

Here are the kenspeckel polling numbers that give Democrats a queasy feeling. According to a new Washington Post-ABC News poll, 40 percent of registered voters say they have more confidence in Democrats and 38 percent say they have more trust in Republicans.

Sounds okay, right? The problem is three months ago, Democrats had a 12-point advantage. The trend is not their friend. On the economy, 43 percent of voters side with Republicans when it comes to dealing with financial problems, while 39 percent favor Democrats.

This is why I was encouraged to hear that President Obama is finally engaging in Clintonian politics and has begun a long-predicted shift to the middle. I’m not referring to the stump-style speech he gave in Milwaukee nor am I referring to the $50 billion infrastructure “Stimulus-Lite” spending program nor am I referring to the expansion of the research and experimentation tax credit.

No, the good news is the President Barack Obama will propose that companies be allowed to more quickly write off 100% of their new investment in plants and equipment through 2011. According to the WSJ, “Companies can now deduct new investment expenses, but over a longer period of time—three to 20 years. The proposed change, which would let companies keep more cash now, is meant to give companies who may be hesitant to invest an incentive to expand, acting as a spur to the overall economy.”

For those keeping track, John McCain proposed a similar plan during the 2008 campaign for a 3-year window for expensing of investments with a 3, 5, and 7-year lives. The big problem with President Obama’s proposal is what he decides he wants to use to pay for the proposals. This is the devil in the details that doesn’t get the headlines or the sound bites. If he chooses to end a corporate tax break to pay for this proposal, the net gain is zero. Also, long-lived investments and tax-deductibility of borrowing costs is a recipe for tax shelters. The lack of details and potential for problems are probably why why US stocks are not seeing much of a bounce on the news.

Wednesday night, President Obama presents his plan in Cleveland. Devils, stay tuned for details.

Cash-for-clunkers, of course! In 2009, this was a stimulus program that thought it was a good idea to take perfectly functional cars and destroy them for a subsidy between $3,500 and $4,500. As the data shows, the program was wildly successful in this purpose as 680,000 units were taken away as sales were moved forward from 2010 to 2009. Like existing home sales, auto sales have been distorted and the process has jumbled decision making not only on the consumer, but also on the producer.

The adjustment process to find that level is ongoing and the housing affordability index is reaching new highs. This is a very helpful development and Robert Shiller believes we may only have another 10% of downside risk in housing prices.

However, there is concern that the process will drag on for some time and that the shadow inventory of housing will swell the number of homes that eventually come on to the market. This would depress prices further and keep the downward spiral active. This is why new action may be needed.

But not new government handouts. What we need are incentive based changes to encourage banks to speed up their writedowns of loans and encourage homeowners to not walk away from upside down mortgages. Here’s a step-by-step program for housing and I discussed it last night on Kudlow Report.

Banks refinance underwater loans at current LTVs and homeowner does not take (1099d) loss in home value.
Homeowner gets to refinance at lower interest rates.
Banks take the loss on the drop in value and take the tax write-off for the loss.
Banks then take a 50% stake in any resale profits on the home from the lower value of home and get to take this profit tax free.
Homeowner gets 50% upside from sale of home from new value.

This way, the homeowner gets to stay in the home and has an incentive to keep maintaining it. The bank takes a hit, but gets upside potential on the home. Finally, this helps clear the market to a price that will get new buyers motivated to purchase and reduces foreclosures. It provides incentives for both parties to act.

Most importantly, it speeds up the housing correction by encouraging prices to fall to levels that reflect their current value and thereby encourages buyers to step in and act.

Yes, there are tweaks to this to further incent (40 year amortization for underwater loans) to restrictions on selling the home immediately (transferability allowed for labor mobility?). But these 5 steps should be a building block for Congress to help resolve the housing crisis faster and to spur new job growth.

Physical therapist $59,547 – $72,999; Occupational therapist: $53,477 – $67,321; Sales representative: $32,711 – $48,120; Customer service representative: $28,261 – $39,102; Administrative assistant: $28,227 – $39,415; Retail sales associate: $23,589 – $40,744; Registered nurse: $46,797 – $65,210; Java developer: $62,571 – $85,438;
Project manager: $50,693 – $79,549; Project coordinator: $38,918 – $54,723; Receptionist: $24,419 – $34,652; Sales manager: $51,240 – $84,999; Software engineer: $59,626 – $80,783; Account manager: $42,004 – $61,975; Technical support specialist: $38,669 – $56,614; Cook: $20,020 – $35,250; Financial analyst: $49,593 – $67,778
Note: Payscale.com median salaries for 5 to 9 years of experience.

Full article on WSJ here:

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704575304575296692796660262.html

The point of what I wrote yesterday was to show that there is not enough being done to get people jobs and training. The current programs are addressing symptoms, not the disease. This is frustrating for everyone, but more so for those without employment. The answers are there and it doesn’t matter which political party finds them. Both of them need to look and be aggressive with solutions.

Physical therapist $59,547 – $72,999; Occupational therapist: $53,477 – $67,321; Sales representative: $32,711 – $48,120; Customer service representative: $28,261 – $39,102; Administrative assistant: $28,227 – $39,415; Retail sales associate: $23,589 – $40,744; Registered nurse: $46,797 – $65,210; Java developer: $62,571 – $85,438;
Project manager: $50,693 – $79,549; Project coordinator: $38,918 – $54,723; Receptionist: $24,419 – $34,652; Sales manager: $51,240 – $84,999; Software engineer: $59,626 – $80,783; Account manager: $42,004 – $61,975; Technical support specialist: $38,669 – $56,614; Cook: $20,020 – $35,250; Financial analyst: $49,593 – $67,778
Note: Payscale.com median salaries for 5 to 9 years of experience. Full article on WSJ here

The point of what I wrote yesterday was to show that there is not enough being done to get people jobs and training. The current programs are addressing symptoms, not the disease. This is frustrating for everyone, but more so for those without employment. The answers are there and it doesn’t matter which political party finds them. Both of them need to look and be aggressive with solutions.

Barro’s argument is the same one used in the 1990s that led to welfare reform in the United States. “The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.” In other words, the program distorts incentives for people to look and achieve a job.

There is a balance that must be struck between compassionately assisting the unemployed and incenting them to search for work. Barro’s conclusion: “…if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.”

The veracity of this argument shows up in the weekly jobless claims. When Congress allowed the jobless extension to stop, we began to see a large drop in weekly claims which appeared on July 9th. When the program was restarted, we had a surge that culminated with a 500k+ filing on August 13th. Both should have been anticipated.

What a different world we would be in right now if the unemployment rate was 6.8%. We’d be struggling, but the country wouldn’t be at a subterranean 50% consumer confidence level. I think one of the most telling comments from this weekend’s Jackson Hole meeting came from a foreign central banker who said he wanted to get out of the meetings and away from all the doom and gloom in the United States.

This is only one part of the puzzle that needs to be solved for the U.S. to get back on track. But it seems to be a simple one to address.

This follows up the comments by S&P in July that warned the U.S. does not have unlimited fiscal flexibility. S&P still maintains their AAA rating for the U.S. but clearly is increasing the rhetoric and pressure to act.

Why? Simply, the US has a deficit problem and a deficit commission. Both are in play with the US running a $1.4 trillion deficit and the President’s deficit commission set to make its recommendations by the end of the year. The Bipartisan Commission on Fiscal Responsibility is tasked with finding ways to reduce federal deficits. However, the first order of business seems to be ousting one of its members.

Former Senator Alan Simpson and current co-chair of the commission sent an email that is causing a stir and calls for his resignation. Sadly, he sent to the executive director of the Older Women’s League (OWL) and wrote: “I’ve made some plenty smart cracks about people on Social Security who milk it to the last degree. You know ‘em too. It’s the same with any system in America. We’ve reached a point now where it’s like a milk cow with 310 million (teats)!” Does this remind anyone of Lyndon Johnson?

Simpson has subsequently apologized, but the damage is done. Serious discussion about what the US can afford with Social Security and what it should pay appears to be taken off the table for the commission. Remember, the Congressional Budget Office has stated that Social Security’s annual expenses will exceed annual revenues (excluding interest) for the first time this year since the 1983 overhaul.

President Obama would do well to assuage rating agencies fears by making a statement to the contrary and putting the commission back on firmer ground. Otherwise by the end of the year, the commission will likely devolve into partisan bickering and the US credit rating will follow.