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Thursday, January 24, 2008

The Stimulus Package Just Seems Like Bad Math

I wasn’t a big fan of the stimulus package because, regardless of the idea of the rebates as tax cut, I can’t imagine that the outlay is going to do much to help people. My own rebate will likely go directly into a savings account to be used to pay my 2008 taxes, which doesn’t work much to stimulate the economy, does it? Perhaps I’ll let someone talk me into buying one of Apple’s new Time Capsules, instead--but if I were to be honest, I would probably be doing that regardless of the tax refund.

I support the business tax cuts, on principle, although, but the rebate outlay is going to be huge and won’t address the underlying problems of our economy. People are more than willing to spend: through the toughest parts of the last few years (and through all of the minor recessions of the last few presidencies), citizens have continued to show a remarkable willingness to spend their money to the point that individual savings are frighteningly low. Is spending really the problem?

Anyway, news of the stimulus deal is further dampening my enthusiasm.

Democratic and Republican congressional leaders reached a tentative deal Thursday on tax rebates of $300 to $1,200 per family and business tax cuts to jolt the slumping economy.

Congressional officials close to the negotiations said House Speaker Nancy Pelosi and Republican Leader John Boehner of Ohio reached agreement in principle in a telephone call Thursday morning.

The officials, speaking on condition of anonymity, said the two wanted key members of their parties to sign off on the accord before any announcement.

The accord came as the White House said Thursday an agreement was imminent.

Pelosi, D-Calif., agreed to drop increases in food stamp and unemployment benefits during a Wednesday meeting in exchange for gaining rebates of at least $300 for almost everyone earning a paycheck, including low-income earners who make too little to pay income taxes.

Here’s what bugs me: if a rebate is in any way meaningful, it goes back to the people who have actually paid. This package won’t send money to the people at the top, but it will send to people at the bottom who didn’t pay in. That’s not a rebate, that’s a brand new outlay and another way of piling more debt onto the current deficit. How, precisely, is that a good idea? Another thing that our economy doesn’t need is even more debt from a Federal government that can’t seem to find ways to keep its budget balanced.

Maybe I’m missing something. Maybe the greater good is being served with significant business tax cuts and the trade off is the only way to have made the deal. Maybe, since I’m not an economist, I don’t understand the complex machinery of our economy that will be motivated by giving an extra $300 to those of us earning little enough to receive the bounteous harvest from Uncle Sugar. It would be fair to assert any of the above, and I’m willing to listen to arguments lecturing me in the ways that I’m wrong; but right now I just feel like we’re seeing another bad deal being made that will fail to address the real issues facing our nation’s fiscal future. That just seems like bad math.

At least Pelosi and Co. can now say that they accomplished something over the last few years. Hollow Achievements “R’ Us.

Read the rest.

Update: Investors certainly think that I’m wrong.

U.S. stocks reclaimed higher ground for a second day after a taxpayer rebate plan was unveiled by the White House and the House leadership, lifting an equities market recently battered by worries of an economic recession.

Read the rest.

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If past performance is any evidence in current events, the fact that everybody is currently convinced that we are entering a recession means that the recession started 3 to 6 months ago.  I don’t see any report of when the rebate checks will go out, but this morning the newsies were saying that it was unlikely to be less than 6 months from now (or 9-12 months after the start of the recession).

Since recessions have been running about 9 months long, that would probably be after the recession is actually over.

Which is really pretty typical of our legislators: expensive, ineffective, and late.

But I’m sure they mean well.  And I’m sure that they’ll make sure to remind us of how “helpful” they were real soon now.

As to that update, let’s just say that I think it just as likely that “US stocks reclaimed higher ground on news that NASA has reported that Mars ‘Humanoid Figure’ Is Tiny Wind-Blown Rock.  Those sorts of stories never quote brokers saying, “I advised my clients to buy, buy, buy (or “sell, sell, sell") because [whatever].” They’re nothing but formulaic and lazy speculation on the part of the reporter.

on Jan 24 2008 @ 03:44 PM

Hi! It’s been so long since I’ve said hi to you!

I think it’s a crock too. I think a good part of the reason our economy is the way it is stems from the fact that we have become a sick consumer culture. We are buying shit we can’t afford, all over the place. It makes me ill that our government’s solution to fix our “pocketbook” problems is to get a refund to buy more shit we don’t need and couldn’t really afford. It’s like economists and financial planners are at odds here: what is good for the economy (spend more money on consumer goods!!!) is horrible for the consumer (pay off your debts!!! save your money!!!), that is a huge disconnect, and I fear it is just pushing off a more crushing blow to the economy.

I’m thinking of cashing my refund and hiding it under my mattress out of spite.

on Jan 24 2008 @ 08:30 PM

Doug, just consider me the choir on this one.

Molly! You know we miss you when you don’t come around, right? Maybe we should all save up our checks to pay for an extra special bash.

on Jan 24 2008 @ 09:32 PM

Dave,

I think that you are missing the point one this one (although I don’t necessarily agree that it is a good idea). The problem with a recession is that you never truly know when one occurs until well after it is in full swing. From Fortune Magazine (http://money.cnn.com/2007/12/21/magazines/fortune/thedeal_recession.fortune/index.htm):

Now, exactly what is a recession? Opinions vary. Many people think that a recession is defined as two consecutive quarters in which “real” gross domestic product - GDP adjusted for inflation - declines. If you accept that definition, which I don’t, you don’t find out that a recession is underway until six months - two calendar quarters - after it has started. (Sorry, too late!) If you use what I consider the proper definition - a declaration by the National Bureau of Economic Research’s business cycle dating committee that the economy has peaked - you may have to wait even longer. Nevertheless, I prefer the NBER version because it’s the collective opinion of seven savvy people rather than a rote formula.

One of the reasons that people keep predicting a recession is a perceived lack of consumer confidence. Retail sales are way up but stocks in retail companies are way down. This is an anomaly. The conventional wisdom is that the big spending upswing in consumer spending over the last few years has been a result of the housing boom - people have been leveraging their home equity and perceived fiscal security (from the high home value) to fuel their purchasing. The Street seems to believe that people will stop spending now that their homes are worth less and the price of gas has gone up. This perception has caused investors to pull money from domestic investment and look for investments in emerging markets like China where there is significant economic growth. The reason that the government is giving you money isn’t because they expect you to invest it - the government expects you to spend it, as I suspect that many will. At the very least it may cause consumers to continue with planned purchases that they may otherwise have pulled the plug on. That’s why the stock market rebounded - investors expect consumers to spend that money which will keep consumer spending up, which will keep suppliers shipping goods, etc.

The key here is that the government is trying to keep people spending their money so that investors keep their investments here rather than taking them overseas.

As to whether or not it will work I can’t say. Although I agree with you philosophically that we should not be giving tax refunds to people who didn’t pay (that’s the kind of wealth distribution mechanism that only a liberal could love) when you look at what the government is trying to do it makes sense. People in the lowest income brackets are the ones most likely to spend that money immediately. People in the upper income brackets don’t need the money they just need reassured that US investments are still good investments.

The difficulty is that we will ever know definitely if the move worked, only if it didn’t. If we don’t go into a recession (most of the finance and economic experts are predicting a slowdown but no recession) then we won’t be able to determine whether it was because of the tax rebate or because we were never headed that way at all. If we enter into a recession then we will know that it didn’t work but then it will be pretty irrelevant because the recession will overshadow everything. At that point the government will at least get credit for trying.

on Jan 25 2008 @ 06:10 AM

Hey, I’m a liberal and I hate it! To spin it another way, this is a huge, government funded subsidy for big business!!!

on Jan 25 2008 @ 09:25 AM

Molly:

Think of it as a “huge, government funded subsidy” that will allow businesses to keep employing people so that employment stays at the current (near-record) lows so that taxpayers won’t have to make a “huge, government funded subsidy” to more unemployed welfare recipients.

Businesses aren’t intrinsically evil - without businesses none of us would have incomes receive tax refunds for.

on Jan 25 2008 @ 10:17 AM

David, the idea that the stock market reacted to a pathetic faux “stimulus” package that would not have any effect for months, rather than high 4th quarter revenue figures from companies like Amgen, Microsoft, Northrop etc. is difficult to believe.

on Jan 25 2008 @ 10:50 AM

The neat thing about stock market reporting is that it is always after the fact… had the market continued to tank, the headline would have been “Stimulus package disappoints Wall Street!” If the day-to-day swings of the market were so predictable, we’d all be rich (or, well, breaking even).

DougS said:

Which is really pretty typical of our legislators: expensive, ineffective, and late.

From what I recall of macroeconomics in college, any government response to economic woe (recession, inflation, whatever) is either too little or too much, but always too late.

on Jan 25 2008 @ 07:19 PM
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