The Stimulus Package: A Mixed Bag with Limited Potential Impact

Congress has reached an agreement on the “economic stimulus package,” and the results were released to the public on Friday, since my high level thoughts on the measure haven’t changed, I'll look at the specifics of the plan and comment on those instead.

Including more lower income tax payers in the plan and phasing out higher income tax payers is a positive, but if you want to stimulate the economy you need to focus on people who are barely making ends meet not those operating at a surplus.

I roundly disagree with raising the mortgage GSE purchase limits on mortgages, for no other reason that despite being publicly traded companies, Fannie Mae (FMN) and Freddie Mac (FRE), have the implied backing of the federal government. The government shouldn’t be providing implied subsidies to the top 2-5% of the population in order to enable them to purchase homes. Having to purchase a $400k home instead of a $600k one is NOT a hardship. If the government is interested in helping the mortgage market, they should just make it easier for loans taken on by average people to get FHA backing and/or sold to the GSEs, not a small portion of the market.

I’m not sure what impact the measures to allow small businesses to write off more expenses and encourage equipment purchases will have, business health (profits, cash flow, etc) drive purchasing decisions more so than tax treatment in many cases. In my opinion, if businesses feel as if they’re struggling, lower taxes aren't going to encourage much spending. The same is true for businesses in general, I don’t foresee companies running out and buying new PCs due to preferential tax treatment if profits are slipping.

Considering the fact that the unemployment rate is rising and probably has been under-estimated, it would’ve been a good idea to allocate some of the stimulus package towards individuals in need of unemployment and/or food stamps. I’m not a big fan of handouts, but you can’t ignore the fact that our society carries a lot of hidden costs due to the unemployed and those that are poor (or close to it). It would probably be wise to mitigate those costs in some fashion.

At the end of the day, the stimulus package is a short-term solution to a long-term problem that doesn’t even begin to address the biggest issues facing our economy at the consumer level: housing. There are some positive aspects to the stimulus package, but at the end of the day it’s the equivalent of placing band-aid on an individual with a broken leg and a small cut, and claiming you’ve fixed the major problem.

But, the aspect of the stimulus package that bothers me the most is that it seems designed to encourage a nation of debtors to spend money, when the government should be encouraging the opposite behavior for the good of our economy over the medium to long-term. Considering that our government is ill-prepared to deal with the coming crush of social security and Medicare obligations, you’d think they’d make it a priority to encourage people to save money as a hedge against the future. Another way to view the stimulus package is as an attempted subsidy for the retail sector, which has already enjoyed several years of inflated earnings from the abuse of consumer credit.

Hopefully, the consumer will thwart the misguided intentions of our government, and either use the money to pay down debt, or place it in savings.

Comments

[Danny Newton:]

What do you think of the suggestion by Huckabee that instead of this stimulus package, an investment in infrastructure would be better? The transportation bill is still locked into a senate and a house version so highway departments are essentially operating on 2006 appropriation levels. It takes about 13 years to deliver a transportation project with the existing system. This is not exactly a fast method of economic stimulation. Theoretically an investment in transportation infrastructure would increase individual productivity and that increase in productivity would eventually be available to the economy for a bump in gross domestic product. The cause and effect relationship between jobs and transportation spending has been explored by many economist but the results and the methods vary quite a bit. If you put $1.00 in and got $1.30 out, that would be great if it happened in only a year. If it took 20 years to get the $1.30 in alleged benefits, the average annualized rate of increase would be 1.32 percent per year. This is below the inflation rate!

2008 Jan 27 04:39 PM

[Markham Lee_:]

The investments should be designed to deliver long-term ROI, not short-term bumps in consumer spending whilst we wait for "something" to happen to fix the economy.

If transportation can be that investment, than let's do it - if not, let's do something else

Our thinking needs to go back to the pre WII and post WWII periods, where investments in FHA, VA Loans, the G.I. Bill, Rural Electrification, the Interstate Highway system, etc, delivered real returns to the country for decades.

We have a choice, we can go for a short-term bump or build something that can deliver dividends to our grandchildren.

In many families in the U.S., those that went to college on the G.I. Bill and bought the family home with a VA loan, were the first generation of middle class people in that family. In effect many middle class Gen X'ers are upper-middle class today due to those first steps taken by their grandparents, we need to implement similar programs today if we're going to spend money to stimulate the economy.


-M

2008 Jan 27 08:29 PM

[whisperonth...:]

Those who could use the extended unemployment benefits did pay taxes within the last year and would be getting that rebate - so should they really get twice the benefit? Maybe. Those who are on welfare (and have been for years) have not paid taxes, they've simply taken benefits. Sure they could probably use more in food stamps but to add to that would be defeating a purpose - they are already getting everything free. How free should life be? Loans need to be made more accessible but the rules should be more stringent so we aren't faced with this again. ARMs should be illegal. Stick with flat mortgages, make them fair, but not so easy that people scramble to buy more house than they can afford.

Student loans need to have their interest rates scaled way back - it is silly to assume that every college graduate finds that A+ high paying job within 6 months of graduation, and to pay higher and higher interest rates with a paycheck that doesn't fit only makes defaulting more likely.

And end the tax on investment interest. It defeats the purpose behind the investment, especially if we are faced with less and less Social Security to depend on.

2008 Jan 29 07:48 PM