The Bush Fiscal Stimulus Plan: Looks Good to Me

Includes: DIA, QQQ, SPY
by: Felix Salmon

Bloomberg News has some details of the kind of fiscal stimulus George Bush is looking for:

The administration is considering a plan that may include $800 rebates for individuals and $1,600 for households as well as tax breaks to encourage businesses to invest, people familiar with the package said.

This seems sensible to me. It's fair, in that everyone is treated equally, but at the same time it is reasonably well targeted at those who will spend it fastest - since the rich are a relatively small percentage of the population, they will receive only a relatively small percentage of the rebates.

What's more, the plan is clearly temporary: no one's going to expect these rebates to return in 2009. And it should help keep investment up, which is necessary for medium-term economic growth.

The money will also arrive relatively soon - as soon as people start filing their tax returns - which means that we won't have to wait too long to see the effect of the stimulus.

Finally, the size seems about right to me: 1% of GDP, or about $140 billion, is affordable but not fiscally disastrous.

I'll be interested to see what James Hamilton thinks, but my guess is that he'll agree with me that insofar as we're going to get a fiscal stimulus package anyway, this is a pretty good way of doing it.

But none of this, of course, should take away from the fact that keeping the broad economy on an even keel is properly the job of the Federal Reserve rather than the Treasury. A short-term fiscal stimulus will help at the margin, but the really crucial thing is to get monetary policy right.