Faulty logic for economic stimulus
January 18th, 2008 by Grant in: Economics, FinanceToday President Bush shed some light on how the government plans to artificially stimulate the economy.
The President said he’s looking for “direct and rapid tax relief” for both consumers and businesses. To achieve this, he plans on implementing an income tax rebate of between $300 and $600 per person, and depending on your circumstances, your rebate may be even bigger.
The white house is looking for a repeat performance from the plan implemented in 2001. It seemed to work back then, however I think the direct effect was a bit over inflated.
But this time it’s different.
We’ve got a different situation this time, with different economic pitfalls pushing the health of the economy down the tubes.
Housing is in the dumps, the stock market is sinking, interest rates are going down, and we’ve still got a credit “crisis” that I feel is under-reported and misunderstood.
The only way distributing an income tax rebate will work to stimulate the economy is if you turn around and spend your rebate. So the question really lies with the American tax payer. What will you do with a tax rebate?
Considering the credit crisis, the mortgage default rate, high energy prices, and the overall increase in consumer staples (like groceries, household goods, etc), I suspect that instead of stimulating the economy by going to Best Buy to buy that big screen TV you’ve always wanted, most people will use it to catch up on their mortgage payments, pay off the credit card, or help pay for gasoline or higher utility bills.
In no way will using this money to dig yourself out of debt help to stimulate the economy.
So the question lies with you.
If the government were to give you a check for $600 right now, what would you do with it?
Tags: economic stimulation | Economics | Finance | rebates
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January 18th, 2008 at 6:34 pm
$600? That would go right to the mortgage - probably not where Bush wants it to go.
January 19th, 2008 at 9:11 am
Grant-
I couldn’t agree more. A knee jerk election year reaction to an economic situation much more complex than the ’solution’ warrants. You are exactly right. Since a major cause of the current economic upheaval stems from debt, it makes sense, as Brooke writes, that a significant amount of money coming in will go toward paying down household debt. It is much more about providing fast, and short term, motivation for corporations to make immediate investments in equipment, employment and long term capital improvements. But then the Bush administration reacted to 9/11 by giving people money to go shopping, so let’s see, we have another crisis, why don’t we give people money to go shopping. It wasn’t very intelligent then and its not very intelligent now.
David
January 19th, 2008 at 10:03 am
I’ve never been one to turn down $600, but I’m looking at this proposal as a gift versus any kind of stimulation. $600 is small potatoes when stacked up against the average joes credit card debt.
To really stimulate the economy through a monetary handout, that handout has to be huge, like thousands of dollars vs. hundreds. There’s no way our even our fiscally irresponsible politicians would spring for that. Economists would say it would work, but the Fed would have to lower rates even further to absorb the economic impact that kind of money would have on the dollar.
As for me, that $600 would go straight to the savings account, and I’d never even think twice.
January 19th, 2008 at 10:05 am
i’m probably not like most people you mention, I’d probably spend the money. i don’t see how me spending six hundred dollars would stimulate the economy though.
January 19th, 2008 at 10:15 am
David,
I agree that any kind of stimulation package isn’t very intelligent. However, in terms of stimulating the economy, it was probably more effective back in 2001 than it will be now. That said, I think the payout in 2001 was given too much credit for influencing the economy.
You know as I do that 9/11 was a terrible event in U.S. history, but the short term memory of Americans and the influences on the economy back then made for a completely different outcome than it will now.
Back then, the events that played out on television tugged at our heart strings, but when that extra money came in, we went straight for the local Starbucks to get those $6 triple mocha lattes to go.
Fast forward 7 years. We don’t have a terrorist event to weigh on our emotions like we did back then, and we don’t feel obligated to run out and buy the comfort food or impulse items that make us feel better about our selves. Now we have credit card debt, rising mortgage rates, increasing gas prices and a deflating dollar.
I agree 100% that to stimulate the economy, you need to provide incentive to big corporate entities to spend big money they already have.
Giving you and I $600 a piece isn’t going to cut it.