As the US economy worsens, and economists start talking not just about Recession, but Depression, there is some panic in the air. Not from consumers or retailers or bankers, but politicians. The economy heading into the dumpster in an election year is a nightmare for incumbent politicians of any party. Americans may protest long-running wars, but they vote their wallets.
It is certain that the government is going to do something to ‘stimulate’ the economy. A tax rebate is the method that both parties seem to have united behind, differing only on the details. The current proposal, which I will use for discussion here, will see up to $800 returned to each taxpayer ($1600 for couples filing jointly) some time this summer. In theory, the recipients will take that money and run out to the mall and buy a bunch of stuff, stimulating the economy and saving the economy (and numerous Congressional seats).
The problem is, tax rebates as a means of stimulating the economy don’t work. It was tried in 1975 and it didn’t work, and it was tried in 2001 and it didn’t work then either. The problem is that it’s too little money, too thinly spread. It simply doesn’t generate the sort of spending that tax rebate advocates claim it will. People spend based on their predicted permanent income, not temporary windfalls. One-time payments like this tend to either be put into savings, or used to pay some bills.
This time the politicians are talking about up to $800 per taxpayer, rather than the $300 they returned back in 2001. It’s still too little, too late.
A few numbers may illustrate the scope of the problem.
Through this discussion I am going to assume, just for the sake of argument, that the average refund would be $1000 (remember, the rebate is up to $800 per taxpayer). I think the real average check (to single and joint filers combined) would be closer to $750, but to keep the numbers simple I’m going to be generous in my assumptions.
So the hypothetical average household gets a $1000 check this summer to pump some money back into the economy. That household has an income of about $48,000 a year. It spends over $58,000 each year. The $10,000 difference is either drawn from their savings or added to their debt. Their total household debt already tops $115,000, of which about $8000 is credit card debt and $10,000 is other short term debt (mostly student loans or car loans).
The interest on their credit card debt alone amounts to about $1300 a year.
The proposed tax rebate would hardly touch the household’s income shortfall, slightly reducing the rate at which they are sinking into debt. It won’t cover one year’s interest on their credit cards. It probably won’t even cover a single mortgage payment.
It’s pissing in the wind and claiming to be a rainstorm.
The miniscule size of the rebate, compared to the scale of the problem, is only part of the reason why the rebate stimulus won’t work.
To see the other reason, let’s assume that a significant number of people do go out and spend their rebate. Think about where most of the goods at your local mall are actually made. Manufacturers in China, Thailand, and Japan would probably get more of a boost than any in the US. The retail sector would get a short-term jolt, but we simply don’t make much for people to buy anymore.
In my opinion, the purpose of stimulating the economy would be better served by spending that money on some sort of public works project. At $1000 each for, let’s say, 100 million tax returns, that’s we’re talking about $100 billion. (This is just illustrative; the actual rebate total will probably be quite different. I’m just cobbling together some figures to show the scale.)
Now, $100 billion isn’t a great deal of money by government standards, but there is quite a bit that could be done with it. It would pay room, board, tuition, and books for every college student in the country. It would buy health insurance for every uninsured family in the country. That’s not the sort of thing I would suggest, though. Not that those aren’t necessarily worthwhile goals, but they don’t directly stimulate the economy. (Tuition relief to college students would help a great deal three or four years from now. The current system of university education is on its way to destroying the middle class, but that’s the subject for another day.)
I’d rather spend that $100 billion on building things. That money would build a hydrogen fuel network that would include about 75% of all the filling stations in the country. It wouldn’t supply the terawatts of power required to make the hydrogen, but it could be done.
We could convert every car in the country to run on ethanol. (It wouldn’t be a good idea–burning food like that is idiotic and you can see the result in the higher prices you pay at the grocery store–but you could do it.)
We could buy up the tens of thousands of abandoned houses being created by the mortgage crisis, renovate them, and use them for low income housing. (Using apartment properties just creates min-ghettoes in otherwise decent neighborhoods. Scatter poor families one at a time in middle or working class neighborhoods and the transplants are much more likely to adopt the values of their new neighborhood, as opposed to taking the old neighborhood with them.)
We could repair the thousands of decaying bridges that otherwise aren’t going to get fixed until they fall down.
We could build power plants. Improve roads. Build schools. Build something.
Spending the money on this sort of infrastructure improvement is superior to a tax rebate in every way but one. Rather than just handing people a check and telling them to go have a night out on the town it puts people to work, gives them a paycheck and something to do. It builds things that benefit society as a whole.
The only thing it doesn’t do is get votes.
The tax rebate isn’t intended to stimulate the economy. It is intended to stimulate the voters. The politicians will hand you a check and say, “See? I care. Go have yourself a good time and remember me come November.”
Public policy decisions are typically not made with the intent of actually solving a problem, but rather with the intent of appearing to be solving a problem. It is the appearance that counts, not the result.
I’ll take their idiotic check, though. Like everyone else, I have bills to pay.
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