On The Issue Of Recession-Stopping Rebates
By Pejman Yousefzadeh Posted in Economy | Stimulus Packages — Comments (8) / Email this page » / Leave a comment »
Kevin Drum's idea of a rebate in the face of difficult economic times is as follows:
. . . Instead of, say, a one-shot rebate of $1,200, why not a monthly rebate against payroll taxes of $100 for 12 months? Add to that a 12-month boost to unemployment compensation, and you'd get a short term increase for everyone who works as well as for those temporarily idled by the recession.
Sure, a permanent increase might be psychologically superior, but knowing that you were going to get a steady stream of money for 12 months might prompt a little more spending confidence than a one-time windfall. Why not give it a try?
The problem with this suggestion is that it is only a temporary stimulus and it likely comes too late to do anything about difficult economic times; remember that most economic indicators are lagging and by the time any stimulus package takes effect, any recession that comes about may well be over and a stimulus such as the one Drum recommends will probably have no effect. Indeed, if this is the kind of stimulus that we are considering, it is far better to have no stimulus at all.
The curious thing about Drum's post is that he seems to ignore the very lesson he excerpts concerning the 1975 recession. Here is that lesson.
Read on . . .
[Milton Friedman's] research had led him to conclude that consumer spending was less a function of liquidity than something he called "permanent income." Friedman observed that when workers lost their jobs, they didn't immediately cut back on spending. They borrowed or drew down savings to maintain spending, in the expectation of finding a new job shortly. Conversely, consumers didn't immediately spend windfalls. They kept spending on an even keel until they achieved a promotion at work, or other increase in their long-term income expectations.
....Subsequent studies by MIT economists Franco Modigliani and Charles Steindel, and Alan Blinder of Princeton, showed that Friedman's prediction was correct. The 1975 rebate had very little impact on spending and much less than a permanent tax cut -- which would change peoples' concept of their permanent income -- of similar magnitude.
So if we really want to stimulate the economy, we need a permanent tax cut. Drum turns up his nose at the idea but the phenomenon of the Laffer Curve is very real indeed and we have plenty of room to cut taxes. No, we shouldn't cut them to zero because there comes a point at the end of the curve beyond which tax cuts will negatively effect revenue collection. But it is possible for us to cut taxes significantly before reaching that point. More importantly, it is possible to reform the tax system and create a flat one that will truly be progressive, drop tax rates on individuals and broaden the base at the same time so that revenue collection increases.
Just follow the link here and you will see how it works. And again, I ask the question that has been bugging me for many years now: Can we finally get tax reform please? There is no reason, after all, to continue with an inferior tax system.
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On The Issue Of Recession-Stopping Rebates 8 Comments (0 topical, 8 editorial, 0 hidden) Post a comment »
You couldn't move your shopping cart for more than a foot at a time without having to stop to avoid a collision at the local Costco yetserday. Most people at the checkouts were going through with full shopping carts. There were mobs gathered around the 67 inch television displays, and the gas lines were more than six cars each, a why bother? length.
It's time to point this out to Mssrs Schumer, Rangel, Reid, and Pelosi and tell them to remove their gen*tal*a from their mouths.
We would not have an unemployment issue out there.
-- A true evolutionist would let endangered species die off. Anyone care to change sides?
-- Saving baby whales and baby trees, but killing baby humans. Huh?
-- imwithfred in lorida--
SImply cutting spending would be a lot better for the economy, but folks would rather pay off the masses. Did anyone see/hear Edwards in Atlanta on Saturday? The ideas he was spitting out were just incredible. I thought he was Hugo Chavez for a few minutes.
-- A true evolutionist would let endangered species die off. Anyone care to change sides?
-- Saving baby whales and baby trees, but killing baby humans. Huh?
-- imwithfred --
... but action is needed NOW to prevent a severe recession. (Many think action was needed before now, and we're screwed at this point). Every time I hear the news, it gets worse. Tomorrow's going to be a bumpy ride for the markets.
The recent economic gains that all sectors enjoyed were a result of loose lending controls coupled with low interest rate resulting in folks being able to buy things their salary would not normally allow them to afford. The federal government cannot 'spend' its way out of this problem with tax rebates, handouts, etc. This is much different then the tech bubble 'crash', and the downturn (recession) will last longer and be a much deeper than in 2000/2001.
While there is nothing the government can do to 'solve' the current economic problems - they can make things worse by spending more to try to 'stimulate' the economy and/or increasing entitlement programs.
I conducted one of my local retail surveys yesterday afternoon (where I visit local malls and retail stores). I was shocked at how little buying was going on in these upper middle class areas. I've been doing this for the past 10 years, so I know the stores and normal traffic patterns in all seasons and times of the day. Other then Apple, Walmart, and Costco, everything else was bleak and empty - even Best Buy... I have never seen such empty stores and parking lots- never.
While we are beginning to see the results of the loose home mortgage policies in the financial sector - we haven't yet seen the effects in the credit card and commercial loan sectors. The list of companies that funded growth and production with cheap, poorly documented loan covenants is huge and could be worse than the current mortgage problems.
Plenty of cities and towns are also 'bonded out' as saying goes... The fallout for school districts, and towns that funded construction and programs with excessive debt is another area for problems. Expect to see headlines in the next year of towns, counties and cities going 'bankrupt' and needing bailouts funded by you and me.
Do not expect politicians from either party to honestly address this - since they loath telling folks that they will be held accountable for poor financial decisions and love to think the government can solve any problem.
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"Enlightened statesmen will not always be at the helm." -- James Madison
...was not an upper, upper middle, or middle class Costco. In contrast to another one located nearby on the state's Western border, where the residents have more money than God, where the drugstore cashiers come to work in Hummers and BMW SUVs, this one visited is definitely in a lower class area.
It used to be not as so, when there were jobs here, when they mindlessly stamped out shell casings, belt buckles, and watch parts by the millions, but those jobs have left for more lucrative areas, but the immigrants still keep coming.
The police department, impoverished by high crime rates and ever lower budgets due to endemic corruption, are forced into the role of solely writing up accident reports and making sure the area is cleaned of debris and detritus after the fact. Active traffic enforcement is essentially non existant, Dodge City and Tombstone, Arizona exist behind the wheel. Based on a frequency of occurrence observation, left turn on red is legal in some areas of the city. In one of those same areas, an elderly couple was killed recently, while making a legal turn, by a newly arrived immigrant, no green card, no license, no registration, no insurance, no reason to stop while traveling at 80 plus miles per hour.
But, yesterday they shopped till they dropped, even Sears had people in it. Maybe there was a recession, but like a summer thunderstorm, its gone by now.
Ah, Calvin Coolidge, we miss you.
It is a handout, anyway you cut it. HANDOUT = REBATE is not in my dictionary, but politicians like to think so. Sounds soooo much better than "Gee ... we don't have any money to spend ... so why not PRINT some more."
TAX CUT .... now, that might work. Or replace every vehicle in the GSA fleet with a brand new Ford or Chevy made in Michigan or Texas ... now, that might boost some economies. Or buy (not lease from some politician's brother in law) up a few "distressed properties" and use them instead of motels/hotels for transient government employees ... now that might bail-out some overstressed investors and whiny financial institutions.
Mayhap, if we all had to bite the bullet and suffer through some hard times, instead of begging China, Abu Dhabi, or Singapore for loans our government and our banks can't repay, we might wake up and replace the politicians we continue to re-elect. But this is election season ... so vote for the guy or gal that promises to take the most money out of your (or someone else's) pocket and give you a "rebate."