Yesterday, President Elect Obama pulled off what I think is one of the hardest political acts to perform; he admitted he was wrong.  From back in the campaign, Obama suggested that part of his stimulus package would be a tax credit to businesses who create jobs.  In 2007, Obama was one of the senators pushing the “Patriot Employer Act”.  That bill would try to designate businesses who hire more US workers and reward them with tax credits.  Last week, that policy started to take the form of a $3,000 tax credit for each job in Obama’s stimulus package.  But the cry against this came from all quarters.  Republicans, economists, business writers and members of his own party brought up their concerns that this plan won’t work.  It’s like eliminating the tax on gasoline when prices are high: lots of politics, no benefit. 

Why doesn’t this plan work?  Part of that is understanding how hiring works.  If I make widgets and my annual production is estimated to be 100,000 widgets, I’m going to hire enough employees to make 100,000 widgets.  If the average productivitiy of an American widget employee is 1000 widgets per year, I’ll hire 100 workers.  A tax credit will not make me hire 101 since I don’t have any work for that extra person.  The only reason I’m going to hire more people is if I can make a business case for it.  If my sales go up to 110,000 widgets per year, I can either improve the productivity of my widget workers through automation or hire more workers.  In the short term, a tax credit might make me favor hiring more instead of improving efficiency.  Down that path lies our downfall since there are already a lot of countries out there from Mexico to Thailand competing by throwing bodies into manufacturing.  US manufacturing will suceed by making the average US worker much more efficient than the low cost competition overseas.  Obama’s plan flies in the face of that, encouraging hiring over improvement.  No business that plans to be here in a decade is going to take that route.  Of course, if they do hire, they’ll be happy to take the credit, but that’s not stimulus.

When the experts line up against you, there are two routes you can take.  The easy route is to say the experts are wrong, that they’re just elitists who don’t understand the challenges facing the everyday citizens.  The easy route is to smile, spend some political capital, buy off your opponents with some earmarks and tell the people to trust you.  But yesterday, Obama took the hard route.  He dropped the proposal from his stimulus package.  Some will claim this is a “loss” for Obama.  I see it as a win for all of us, not just on this proposal, but on how our new President will handle our money and affect our future.  Obama has said he takes “takes no pride of ownership” for the ideas in his package and that he would set aside ideas that don’t have merit.  Now we know that isn’t just hype.  I don’t know how the stimulus package will work out, but I’m a lot more confident that we have the right team at the wheel.