Stimulus Effect

Americans received a “gift” from the government recently in the form of a stimulus check. Or, some people may like to think of it as a tax rebate or tax refund. It doesn’t matter what you call it, the fact is most Americans who filed taxes for 2007, received a stimulus check from our government. Values started from $300 and up depending on family size, etc. All in all, the government economic stimulus plan injected $168 billion into the economy, with $92 billion coming in the form of checks to Americans. Delivery of these checks occurred during April to mid-July. Now that we are about a month past this monetary injection, have we noticed any change? Have Americans become “better off” due to the insta-check-rebate?

The Gross Domestic Product for the United States in 2007 was just under $14 trillion. Can $92 billion create enough of an impact when the value is distributed amongst say 150 million Americans? $168 billion is about 1.2% of the yearly GDP. In my mind, injecting about 1.2% of instant cash in the market in such watered down portions you will not see the entire effect. According to the latest statistics released by our government, my theory proves true. During the second quarter, our GDP increased by 1.9% annually, a 1% increase over the first quarter (0.9% annually). In reality, the 1% increase cannot be attributed to the stimulus checks, there were other factors increasing our GDP during the same time frame. We can safely say the stimulus check did not provide the return on GDP in a one to one fashion.

Did we really think it would? When you were informed about the stimulus check coming your way, did you jump up and down and instantly begin writing down a Christmas wish list sponsored by the government? Or, did you react gratefully and fully expect to deposit the check into your account and then promptly write a check to pay off debt that has been incurred as our costs of living increase among other things? That’s what I thought. The check is not a “go out and buy something extraneous” economic injection. It turned out to be a “get the family past another week” check. These types of monetary injections do not change the tides of economic distress. Yes, they do alleviate the immediate stress for a very short amount of time, but they do not create any lasting impact. At least not in the dollar amount we saw as individual Americans.

As a nation, we are falling farther and farther into debt. Our discretionary cash as individuals continues to decrease as our earnings are continually spent to pay off debt and day to day living expenses. Stimulus checks are great if we are able to utilize the extra cash for discretionary spending, but when such a small individual amount is used to pay existing debt, there is no true immediate benefit to growing the economy or GDP. It is a short term solution that will be negated by the rising costs of living and accrued debt. Politicians continue to talk about stimulus checks and rebates. It makes them appear to be proactive when faced with an economic crisis. The government cares, we are going to “give back” and help you out in your time of need. Where does that money come from you may ask? It comes from the American tax payer in the form of taxes, previous or future. We have basically bought our own “Christmas presents.”

Can a stimulus check be effective? Sure it can, but only if the individuals receiving it are able to utilize the money in a manner which moves them forward. I’m not talking about spending the money on a new television. I’m talking about investing the money. Injecting “small” money into the economy that will be gone in an instant does nothing for long term economic health. Money injected into a household that will increase wealth is how you sustain economic growth. As our economy has become more volatile through the years, compare that to the American savings rate. Our personal saving rate has reached dangerously a low level. Without savings, there is very little ability to increase wealth in the household. We have basically become a nation of spending everything we have to live. Stimulus injections help us by allowing us to breathe easier for a few days, nothing sustainable.

Is there a way the government can truly change the economic future? I believe there is, but it’s a very drastic measure and in our capitalistic society, the profitable businesses affected would scream bloody murder. Debt, in the form of credit cards, has been eating away at our nation’s wealth for quite some time. Yes, the individual consumer made every decision to charge them up. It is our fault, no way around that. But, as lending and bank institutions begin to falter due to rising amounts of non-payments and defaulted loans, they are in no better shape than in the solution which I will propose. As a note, when the failing lenders are propped up by government, every American taxpayer then assumes the bills the defaulting individuals have failed to pay. That sounds fair doesn’t it…

What exactly is the proposal which can truly impact our economy and give us a boost that will sustain for the long term? My proposal is to give every head of household a single “get out of jail” free card, issued by the government. This “card” will allow the household to simply write off a single credit card debt they own up to a certain amount. Let’s say $5,000 per head of household. Banks and lenders will scream they are being cheated. The consumer shouldn’t be allowed to “rob” them of their money and profits. I agree, but think about it another way. According to a New York Times article, our nation could be facing a bank bailout approaching $800 billion. That means the banks and lenders are failing. People cannot pay their debts. They are going to lose this “profit and revenue” in either scenario.

However, under the “get out of jail free” stimulus, the government zeroes the ledger. Guesstimating 150 million (I assume real data is much lower) heads of households at $5,000 per head, this creates a stimulus of $750 billion. This puts us in the ballpark of the potential amount of banking bailout costs. Rather than continuing to force EVERY American tax payer to foot the costs of failed banks, we can help EVERY American household in such a way to alleviate their fiscal pain in a long term fashion. I’m not going to run through all of the pros and cons of this solution, but it is a solution. Ever hear of governments writing off debt for our trading partners? In this case, our trading partners are the American citizens. If we can help out partner nations experiencing a financial fiasco, why not apply the same theory to our own society?

This is a solution that will never see the light of day because someone will ultimately believe we are taking money from their pocket and food from their mouth. But no matter what happens, eventually, something will change and I’m guessing that the American taxpayer will be footing the bill for decades to come.

Citation: Government Data & New York Times & CNN