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I am sure all of you have heard the news recently concerning the worries about the economy heading towards or being in a recession. The pundents are preaching doom and gloom and the news is scaring everyone, which is what news stations love to do. Not to say that I disagree about the recession part; it is my personal and humble opinion that we are in a recession. Also, two years from now when all the data is in the National Bureau of Economic Research, it will show that maybe from middle 2007 to about year end 2008 we are in fact in a recession. But that is not my topic of choice today, I would like to touch on the news of President Bush’s proposed tax rebate to help stimulate the economy.
The proposal is a $600 rebate for an individual and $1200 for a family. The hope is that the consumers will turn around and spend this money in the economy, thus stimulating growth. Yeah I know, there are more business cuts and such, but the big news is the rebate for the consumer. I would like to point out a major and fatal flaw of the rebate program as a stimulus package: it is a one time rebate! Providing a person with $600 or $1200, depending on the situation, in the beginning of the year will not create a change in the consumers individual long-term spending. In order for the stimulus package to work, you need to provide the consumer with a long-term change in there income in order for the consumer to feel comfortable changing their spending habits.
Think about this as you finish reading the post, what would you do with the $600 or $1200 dollars that the government plans on giving to you for 2008? Are you going to increase your spending for the year? Maybe buy a new car or some fancy new electronics? Or will you spend it on some bills or simply just save the money? Me personally, I know we will save it if we get it. I may go out and spend a small portion of it but the money is not long-term nor is it substantial enough for me to change my spending habits.
Sorry Mr. President but you need to do a little something more to stimulate an economy. Or perhaps this is just a political stance to help give your fellow Republicans a little positive press going into a crucial election year.
As I was adding the finishing touches to Santini’s post, my radio program was interrupted for the House press conference about the stimulus package. Listening to it really reinforced what Santini said at the end:
But listening to Pelosi, it seems like a political-points grab-bag for both parties. They were tripping over each other to be the first to talk about how ‘bi-partisan’ their party acted.
How well will this plan work? I really don’t know. Until I learn more, I will deffer to my brother’s superior knowledge in this field. What I do like is the underlying demand-side economic philosophy. I believe economies work best when capital flows from those who don’t know how to hold onto it to those that do. The problem becomes once that capital over-accumulates at the top, the flow slows. It requires a redistribution of wealth to re-stimulate the economic flow.
We’d use it for debt. I agree that as someone said, it seems like a bandaid on an arterial gash.
We’d use it for debt as well.
But I would argue that Sid’s readers may not have the same spending habits as the majority of Americans.
That being said, even if we all did go out and spend it immediately, it seems like an artificial solution that works mostly to distract people from confronting realistic long-term solutions that are bound to be more difficult to tackle.
Bridget you are so completely right on with your two observations. First, most of America won’t have the same spending habits that the loyal readers of this site have. We are more apt to use the money wisely and either save it or pay off some bills. I am sure there is a large section of American’s that will jump right out to the bar and blow the $600 dollars in a weekend or whittle it away in some similar sort of fashion.
And that observation leads directly to your other point or observation, which is that the stimulus is merely an artificial solution; meaning it is not a solution at all. In the short, short run it may inject some cash-flow into the economy; however, it will not be a continious increase in spending. It is a quick bump of cash influx that will quickly disapate because a one time rebate will not allow for a person to adjust their long term spending plans and create a postive cash flow into the economy over a much needed extended time period.
That being said, and now working off of Sid’s point, this is not meant to be a jab at Bush per se but at all politicians. They use these moments, when people are seeking answers and actions, to manipulate the masses and make them think they are doing something good. It is sad because people will say that Bush (or any President who would propose such a plan) is so smart or did something great when in fact it could make things worse off.
I say it could make things worse off because the stimulus package is meant to help the struggling economy. The way that we measure whether or not the economy is growing by measuring GDP. So an important question to ask is what makes up GDP and what factors will make GDP increase. I think you all will see the irony in the stimulus package that is estimated to cost the government $150 billion, when you see the components of GDP…and GDP is Consumption + Expenditures + Government Spending + Net Exports
Yes that is right Government Spending is part of GDP, so in the end will it really work as a stimulus?? Doesn’t look like it.
But please remember I am purely talking about the consumer side of the package and not any thing else that is involved, I plan on posting on that later!
SHOES! SHOES! SHOES! SHOES! SHOES! SHOES!
Okay – not really, I will use my one-time $600 to pay off some debt. Although Sid does really want a Wii
Since this payment is a onetime thing and most wise people will use it to pay off debt or for savings neither will stimulate the economy. What would happen if the $1200 was sent in six equal payments, maybe every other month? $200 a shot is not a large amount so more people may be likely to stock their groceries, or do shopping for back to school
etc…..
Just wondering?
That’s an interesting thought. I’m not sure. I suppose that having repeated payments would at least be more likely to form a spending habit. Santini may have a better answer.
Yes having the payments spread out over a period of time is more beneficial. Now whether or not spreading this stimilus over 6 months would change people’s spending habits would be decided by each consumer but I do think that it would make more of a difference. And the difference would happen for percisely the reason you stated, it is not as much money as getting $1200.
I think what would really be beneficial would be having the extra money for over a year, I know at that point I would adjust my spending at that point.
I agree with you on this one. I think the biggest trouble people will have is to save the extra money, rather than using it to curb their spending habits. Easy come – easy go!
Not good at all!
The govt wants people to spend money when in actual fact the govt should be encouraging people to save money!
Americans have the lower saving rates right now than in many generations certainly since the depression.A negative saving rate is not sustainable big time.Everyone should pretend that they have taken a 10% pay cut and save that difference.
If you say that is too difficult well there are lots of people who have taken a pay cut much greater than that like going from auto manufacturing to walmart and are still managing.
If America’s well being depends on people blowing a rebate cheque then something has gone drastically wrong.That sounds like kindergarden economics
Welcome to consumerism. Please enjoy your shopping.
Attention American shoppers banks and brokerages have got a trillion dollars worth of garbage which you will be purchasing for full price and the executives who caused it will be walking away with fat severances as if nothing had happened.
Stan O’neil who was ceo of merril lynch when it lost 8 billion dollars last year left with a 160 million dollar good- bye present.
Anything wrong with this picture?
Clean up in aisle 9 it is called the American economy and it has just tipped over and spilled it’s derivatives and synthetic money all over but be careful not to touch it because it is toxic to your financial well being.
Airfare….
International discount airfare. Low price airfare. Airfare. Cheap airfare….