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Arousing the Economy

Aug
20
2008

After a brief midsummer bump, consumer spending is on the decline, always a signal of a drop in economic confidence by your average American. The economic stimulus checks of 2008 apparently did not provide the same benefits of the 2001 payments which, until the World Trade Center attack, pulled the country out of the Post-Tech Bubble Recession.

Of course, the U.S is still not in a recession. American exports are surging and the dollar is strong. The price of oil is falling, so inflation should be less of a worry. So what gives? Why are consumers not buying in to the economic rebound?

The American consumer is under a lot of stress. Wage inflation is not keeping up with actual inflation, so as people’s paychecks remain constant, their cost-of-living continues to rise. And the amount of pressure they’re under – when it comes to paying taxes to Uncle Sam – remains constant.

Although some may argue about the efficacy of the 2001 Economic Stimulus Package – labeling that year’s payments “Bush Tax Cuts,” as if the president’s name were a four-letter word – the fact remains that when it was time for Congress to try to salvage the economy this year they took a page from the Karl Rove’s 2001 playbook and wrote a check to every American taxpayer.

In fact, Congress doubled the amount of the checks! But somehow, they did not have the same effect.

Why not? Well, there were three main differences between the 2001 Stimulus Package and the 2008 version.

For starters, in 2001, we all received our tax rebate checks in the mail. That $300 may not have been much, but it was something tangible. It felt like relief.

In 2008, in order to speed up the effects of the stimulus package, Congress and the White House decided to send money to taxpayers via direct bank deposit, so it would hit their bank accounts immediately.

That’s kind of like the difference between reading an actual newspaper and reading on-line. If I have the calendar, datebook or whatever section sitting in front of me, I will at least see if anything is interesting. On-line, I seldom venture into that section of the newspaper website. With the decision made for me, I get what I want how I want it and move on.

Taxpayers didn’t see an actual check so they were less likely to go out and spend the money. They used the “surprise” cash – oh, look, we’ve not overdrawn! – to pay down debt or skip a savings payment.

The 2001 Stimulus Package was more than just a bunch of checks going out to everyman. In addition to the $300 checks in the mail, marginal tax rates were reduced across the board. The rich and ultra rich were paying less taxes on every dollar, but because they reinvested their proceeds from the stimulus, the rich and very rich ended up paying a greater share of taxes after their tax cut than before.

Now that’s stimulating the economy!

This ties into perhaps the greatest difference between the 2001 and 2008 stimulus packages, when it comes to boosting consumer confidence. In 2001, the rebate checks accompanied a marginal tax rate reduction from 15% to 10% on the first $6,000 of taxable income with even more reductions as paychecks went higher. This meant that, after the stimulus checks were spent, people continued to see paycheck inflation without the negative effects of wage inflation. Every two weeks, they had more money than they had before. And that’s what kept the economy running.

So if Congress looks to pass yet another economic stimulus package before the election – hey, they’re Democrats, anything can happen – they might consider taking a pass on the politically expedient tricks of sending people checks right before the election. Instead, they should look at what worked the last time around and stop teasing taxpayers.

Share  Posted by Scott Olin Schmidt at 6:35 AM | Permalink

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