Over-stimulated?
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
February 18th, 2008 at 11:09 pm
I think it is a good idea that the government is giving out money to people, I’m sure this will help out many people at the time.
The government is hoping the majority of people in the United States are impulse buyers. However, I’m pretty sure the government will come back for it in the future by raising taxes on a state level and/or federal level. I totally agree with saving the $600 when I receive it because eventually I will just have to give it back in some way, shape or form.
February 20th, 2008 at 12:24 am
I believe Economic stimulus proposals tend to focus on the short-term. Since much of that money will end up buying imported goods, its economic benefit here in the US will be diluted. There may be a role for stimulus, but it should be thought of as short-term relief more than an economic fix.The way to help the economy over the long term and recreate lost jobs is to reduce the cost of doing business, especially the cost of employing workers in the US. That is why I favor cutting employer-paid payroll taxes. Also, i think we need to reduce businesses’ health-care costs. Its not a def. but in the long run it can really help.
February 24th, 2008 at 11:51 am
In my opinion the government has a good idea about how to stimulate our economy and gets our “supposed recession†moving. I would support the debit card issuance over the check distribution. I think that the debit cards solution would make people want to go out and spend money which is what the government wants. If people got a check, they would more likely to deposit that check and use if when they really needed the money.
Since the debit card solution puts a time limit on the time allowed to spend the money or “lose it†then people are going to spend. During this time limit our economy is going to have a rapid increase in sales and this rapid increase in sales is going to generate a lot of money and with this large amount of money our economy should start to boom.
Although this sounds like a flawless idea there are some draw backs. Like professor “CT†stated, some people are going to simply spend the government’s money and keep their money to spend later down the road. Another thing that could happen is some people are going to see a negative side to the time limit and are going to think that this is just another way for the government to control us.
February 27th, 2008 at 9:07 pm
The part of the stimulus package that really shows the ignorance of our politicians is this: individuals who have an income of 87K and up do NOT get these returns. However, these are the same Americans that already have to pay a majority of the nation’s taxes, most of these people own businesses (which obviously aid our economy), yet they are left out of the mix? Why should the rich have to pay for the poor? In reality, it is the upper class that will mainly pay back the money borrowed for the stimulus package. Many people that will receive money from the stimulus don’t even pay taxes! Personally, I’m tired of the rich having to pay for the mistakes of ignorant politicians and citizens. This whole situation could have been easily avoided if ARM’s would not have been given to high-risk home buyers, which in turn, led to the sub-prime mortgage collapse as well as thousands of home foreclosures. So no matter if there is a time limit on the stimulus package or not, I think it is irresponible to make wealthy Americans, that work hard for their money, pay for the mistakes of others!
February 28th, 2008 at 8:38 pm
I think it’s important that all of us who are going to be receiving our money this summer to thank the government for giving us the opportunity to comfortably choose Quiznos over Subway for our fresh made sub cravings. It is an election year by the way.
I seem to be confused about this recession talk. According to my handy copy of “Complete Idiot’s Guide to Economics” a recession is defined as two consecutive quarters of contraction in GDP. We hear all this talk from politicians and commentators about how we are in a recession; however, GDP has not experienced negative growth yet (0.6 in 4Q of 07). Granted this is low, but apparently some people have given themselves the authority to redefine what a recession is. Once again, it is an election year.
Barrack Obama doesn’t need an economist to tell him what a recession is. There are people struggling out there. Apparently they must have hit rock bottom in Q4 because Q3 GDP growth rate was 4.9%. The truth is people strugged in Q3, they struggled in Q4, and they will struggle no matter who is the president, no matter who controls Congress, and no matter how big of a “stimulus” package Congress passes. This package is not meant to make any sensible difference, as Dr. CT pointed out. It is an election year. That’s all.
April 3rd, 2008 at 2:36 pm
The taxpayer cost of this stimulus package will be more than the actual $600 per person and the associated costs of issuing checks or debt cards. This stimulus plan will cost the taxpayers more money because the government may have to issue more bonds or borrow money from other countries to cover the stimulus. And whenever the government borrows or issues bonds, there are financing charges associated. And to repay these bonds or other countries, taxes will have to rise. Bottom line is that although the rebate sounds nice, it is nonetheless more government spending. The only way that the taxpayer would be better off with this rebate program is if the government would start reducing its spending before and after the tax rebate to offset all the costs (rebate money, issuing, and interest), maintain the reduced spending, and not to increase taxes. Also, what about the taxpayer that will receive an amount greater than $600 and their eventual impact on the taxpayer that is only receiving $600? My rebate check will be used to recoup the money I spent this March on 2007 federal income taxes and will pay this month on state income taxes. Although my burden of paying taxes will be offset some by the $600 and paying this much in taxes was unanticipated, I did not plan on spending an additional $600 in 2008 regardless of the source of the money (unless I win the Powerball).
April 3rd, 2008 at 3:48 pm
I think that this dolling of cash will contribute to the weakening of the economy.
The feds last attempt to boost our sagging economy was with a printing of billions of dollars and allowing banks to grip this newly printed booty at a interest rate that was below 3 percent.
I am no economic genius, but if an economy is suffering as ours is and the value of the dollar plummeting around the world (euro vs. $). Then, flooding more essentially free cash into an already deflated pool of dollars seems it would weaken the existing pool. Basic supply and demand, Abundance causes devaluation.
And briefly on this topic, what is the main buzz of the economic woes at hand, MORTGAGES. Poor souls Being forced to pay ARMS over the original loan rate, to a lesser valued land appraisal. Stop these people from forcing a issue that is not as big as it is made out to be. My car was 41000.00 now 25000? The decision was mine and I am not going to turn it over to the bank because I am upside down. Who is forcing these appraisals and issuing all the second and third mortgages? Houses are not investments, you live in it to keep the rain off your graying hair and if your purpose is other than that you are not a typical home owner.
President Bush has a cowboy simple mentality, give the people money and they will spend it thus helping the economy. Given the inflation factor it will contribute to, I think It would be more beneficial to give the rebate to Europeans and allow them to purchase more American goods at our third world prices.
Lastly have you noticed any drop on your VISA finance charge, or mortgage rates…No only a fast dropping CD Rate. How can the prime interest rate drop
and the rest of the economy swallow these high retail interest rates. Maybe these
Big companies took this free money from the Feds and absorbed it all up to shore their poor financial state. If that’s the case things are much worse than we know.
April 15th, 2008 at 11:52 am
I think the tax checks are a good idea. There is always the possibilty for the worst case scenario to happen, like someone saving the money, but eventually the money will be spent. I think most people are excited about the check because it has the potential to help many families out with items they have been putting off buying items because of money shortages. I know personally my parents are exstatic about the checks. My mom has plans on spending it before it has even come in. Although there is always a worst case scenario, people need to look on the optimistic side of things as well and compare the two instead of always being so pessimistic.
July 1st, 2008 at 5:48 pm
[...] checks … But all of those problems could be avoided by issuing debit cards with an expiration …http://www.nicholls.edu/bastiatsbastions/2008/02/17/im-over-stimulated/WLOX-TV and WLOX.com – Building South Mississippi Together Stimulus …WLOX TV 13 – The Station for [...]