The 2008 Tax Rebates: How much will it help the economy?

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I don’t know about you, but I’m already developing a list of ideas for how to use that check the government will soon be sending out to stimulate the economy: pay off my income taxes, pump up the kids’ college funds and pay for a couple of things in cash instead of using my credit card. Unfortunately, that is precisely the kind of thinking that our leaders in Washington hate, which is one reason I doubt this $152 billion “financial stimulus” program will have any significant or lasting effect on the economy, other than to put the government $100 billion deeper in debt.

Washington’s wish

The government has no interest in having us save or invest those checks, which will range from $300 for a single, childless, semi-employed person to $1,800 for a couple of married taxpayers with two children (couples with more children will get more money). They hope we will keep the money in our pockets long enough to cash it in and run down to the electronics store and get a nice flat-screen TV.
In short, the reason we’re getting this money is that the government wants us to spend like drunken sailors. “I’ve always said that what we needed to do was to put money in the hands of those who will spend it right away,” said House Speaker Nancy Pelosi as she unveiled the proposal.

As he gave the proposal his blessing, President Bush said, “The incentives in this package will lead to higher consumer spending.” 
Federal Reserve Chairman Ben Bernanke said the money would be most effective by being targeted at the poor. Not because it would help them rise out of poverty, but because they do a much better job of spending cash immediately because their budgets don’t allow for the luxury of saving. “Getting money to low- and moderate-income people is good to get a bigger bang for the buck,” Bernanke told Congress as it was devising the package. “If you’re somebody who lives paycheck to paycheck, you’re more likely to spend that extra dollar.”

A worrisome measure

There’s something worrisome about a society that measures itself not by how much it makes but by how much it spends. Two-thirds of our so-called gross domestic product—the total value of the nation’s output of goods and services in a given year—is made up of consumer spending, which is why this money giveaway is seen as boosting the economy. The remaining third is mostly made up of business and government spending. In other words, the GDP in reality measures our gross domestic consumption, with emphasis on the word “gross.”

Back when economists first conceived of the GDP, there was a reason for this. There was a strong correlation between spending and production. Just a few decades ago, after all, when we spent our money at the car lot, department store, supermarket or gas station, it generally meant we were helping employ autoworkers in Detroit, oil drillers in Texas, toymakers in Ohio, TV manufacturers in New York or textile workers in the Carolinas. In other words, the spending was tied to our domestic production. These days, a huge chunk of our spending goes to places such as China, Mexico or Saudi Arabia. The short-term boost in spending might help employ the retail workers who are peddling those goods, but will it truly invigorate our economy?

It’s been tried before

This has all been tried before. In 2001, the Bush administration issued advance-refund checks to taxpayers, which came to as much as $600 for married couples. Middle-class recipients typically stuffed the checks into their savings accounts. A recent congressional study said they spent less than 20 percent of the checks. The same study said that poorer people generally spent the money immediately.

But did that one-time cash injection make any significant difference to the economy? Jim Bliesner, director of the San Diego Reinvestment Task Force, is doubtful.

“I wouldn’t want to deny those checks to anybody, especially poor people trying to make ends meet,” says Bliesner, whose group tries to improve the economic conditions in low-income neighborhoods. “But the shelf life of this kind of stimulus is for thirty to forty-five days. It’s sort of like delivering an electric shock to a person who’s had a heart attack. And the current proposal doesn’t do anything to address the real problems of the past couple years, such as the practice of attaching home mortgages to speculation on Wall Street.”

Economists are split 

In a way, this spending does reflect our gross national product if your definition of “product” is “debt.” Debt is the thing that Americans are best at producing. Debt for exports. Debt for credit cards. Debt for government spending, which will only be increased when the government spends $100 billion putting these checks into our mailbox.
“I think our problem is that we’re spending too much,” says Kelly Cunningham, economist with the San Diego Institute for Policy Research. “I don’t know that trying to encourage people to spend more will help. It seems like it will only prolong the coming correction that has to come. I think we should take our medicine and start paying off the huge debts that we have as a nation.”

At a recent economic forum at the University of San Diego, economists were split over the rebate. “Something needs to be done to boost the consumer,” said university economist Alan Gin. “The tax rebate will help a little bit—but not a tremendous amount—for some people who are under stress from high oil prices and rising unemployment.”

But Marney Cox, economist at the San Diego Association of Governments, suggested that the money would provide relatively little help compared with the amount of debt that the government would take on. He suggested that investing in the nation’s infrastructure, which would put more people to work, would better spend the money.

And Mark Cafferty, interim chief executive director of the San Diego Workforce Partnership, suggested that it might be better to devote more money to improving job training and educational programs in order to help people find more productive employment.

Infrastructure? Job training? Educa-tion? These all sound suspiciously like investing rather than spending. And, as we all know, spending is king.