Bastiat's Bastions

It has been driving me nuts – at last, I have been pushed beyond the edge. This is an article from Glenn Beck on CNN. He is discussing the stimulus plan that has been passed.

If you have been in a cave, the story is the Uncle Sam is going to send us a check – about $600 for middle-class types without kids. The story goes (or at least is supposed to go) that after people get their stimulus checks, spending will pick up (or is at least supposed to), and this increased spending will get us out of the recession we are in (or are at least supposed to be in).

The concern that some people have is that people won’t spend their checks, and thus the promised stimulus effect won’t occur. For the record, I share this concern. Glenn Beck is worried about this, but has a solution (or at least thinks he does).

Here’s a quote:

Debit cards also would have another big benefit over rebate checks: a deadline. One major concern about the checks is how much time it will take for the IRS to issue them (they’re a little busy processing 140 million tax returns right now), then for people to cash them and eventually for that money to be spent. But all of those problems could be avoided by issuing debit cards with an expiration date. Give people three or six months to use up the value of the card and, after that, it’s worthless. Use it or lose it…Issuing tax rebate checks will not only cost us billions of dollars that we don’t have, but there’s absolutely no guarantee that the money will ever actually be spent. Issuing debit cards would also cost us billions of dollars, but at least we’d know that every single one of those dollars would be put back into the economy.

Glenn as at least right that the spending / not-spending issue is central to the potential effect of a stimulus. But Glenn’s quote above suggests that if someone gives me a card that entitles me to spend $600, I must therefore spend $600 more. He’s dead wrong.

Suppose I was planning on spending $1000 in July before I considered the debit card Beck wants to send to me. Then Uncle Sam sends me a card with $600 I have to spend (for simplicity) in July. But gosh, I don’t want to spend $1600 this month. So what do I do? I spend only $400 of my own money, spend $600 on the card, and still save $600. No stimulatory effect from me. Debit card or check, I can still save my refund check.

What is one big reason I might not want to spend my refund check? Let’s discuss an idea called Ricardian Equivalence.

Think of your own credit card balance. If you want to have a party now, and you don’t have the money to pay for it, you can borrow on your credit card, and have the party. From there, you have two choices. You could make the minimum payment for a really long time until you die, or you’ll have to pay it back eventually. Either way, in the future, you’ll have to spend less than you earn. The bill comes.

Believe it or not, the same type of situation faces Uncle Sam. If Uncle Sam wants to have a party now, the bill will come. What we know is this – eventually, Uncle Sam must either spend less, or earn more. Oops – I used the word earn. Uncle Sam must spend less or tax more.

Let’s suppose that we’re sure that the way the government is going to pay the bill is to raise taxes in the future (instead of spending less). More or less, if Uncle Sam gives me a rebate of $600, they will increase my taxes by $600 in the future.

And if I’d like my spending patterns to be smooth (so my spending doesn’t fall when Uncle Sam raises my taxes), I can just save my $600 now, and give it back when Uncle Sam raises my taxes by $600.

So why would someone not spend their check now? Because they realize that Uncle Sam will be coming for it later.

There are other issues going on – but people will save – and the stimulus package will not be as big as promised by its proponents.

–CT