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Tax rebate plan: Good idea?

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It looks like Congress will give the green light to mailing out rebate checks to most Americans this summer in an attempt to avoid a pre-election recession. The idea is for everyone to go do their patriotic duty and shop, shop, shop. The more we buy, the more we stuff we need to make.

There are a couple of questions that need to be asked. Will these checks actually do anything on a short term basis? Even if people do go out and spend, is this a desirable outcome? Finally, assuming we are going to spend $150 billion, is this the best we can do?

On a short term basis, giving people money WILL increase spending. How much will it increase spending?

Some families will get their rebate and pay off credit card bills or put the money in the bank. While this may actually the wisest thing to do, it does little for the economy on an immediate basis.

Many people will spend the money. Some will use it to sustain unsustainable lifestyles – those financed by continual dips into their home equity – for another month or two. By summertime, when checks will probably be mailed, home equity loans will be difficult to come by and credit card limits will have been lowered.

There are the poor who have plenty of things they need to buy and can’t. Their checks will be spent the day they arrive – maybe even before (I am sure the same fine financial institutions that specialize in payday loans will lend against rebate payments).

Of the money spent, a portion will enter the US economy and the rest will go abroad. Best Buy keeps some of the cost of a new TV but 75% of it goes to Asia, the land of electronics.

When you balance all these factors and consider who will get what rebate (they are going disproportionately to the well off), you could have $50 billion entering the US economy this summer. That is a lot of money. In a normal downturn, it would be a serious kickstart. What is happening now is far from ordinary.

Headline news right now are focused on the housing bust and financial markets crisis. Construction is plummeting, home sales have plunged and home prices actually fell last year. The financial markets, who got fat off the boom, are now the first to feel the bust.

If we were merely dealing with the aftermath of a housing bubble, it might not be such a big deal. But housing is just one part of the story.

The dramatic rise in home prices and financial market “innovations” have masked over substantial economic problems. A frightening number of American families are spending more money than they earn. This underwater group includes a lot of boomers who should be socking it away for retirement. If families had to publish financial statements like companies do, many would be in the red.

Part of this is a spending problem. The economic statistics for consumption are almost unbelievable. There has been a 10% swing from saving and investment to spending.

We have made it patriotic to go into debt to buy stuff . Our natural competitive streak also applies to keeping up with our neighbors.

Prices have also increased. The cost for health care, energy, education, childcare, food and other essentials has gone through the roof. It is likely that published inflation numbers have dramatically underestimated how much the real cost of living has increased.

Part of the problem is an income problem. We have been transitioning from a manufacturing based economy to a service based economy. This is a trend that started in the 1950s as factories became more efficient and accelerated in the last 10 years with globalization. At this point, the number of workers who make their living in a factory as a percentage of the US work force is almost trivial. Some of this was inevitable and a positive event and some of it is the result of totally laissez-faire industrial policy.

In addition, the balance of power between management and labor has swung far away from the worker. Again, labor flexibility and mobility is a positive but a winner-take-every-little-scrap economy with a diminishing safety net is ultimately not very stable. You need a strong middle class who can save for their future without fear that one medical event will set them back. You need a domestic market that can buy your goods and services without having to take every penny of equity out of their homes. Etc etc.

These are challenging waters to navigate and sensible policy-making has vanished. We appear to be moving away from our problems rather than in the direction of solutions.

I just finished reading Robert Rubin’s memoir of his time as Secretary of the Treasury and the failure in certain key arenas of the policy-making apparatus in the 1990s was apparent, even with an incredibly talented group of people working for the Clinton Administration. I will not even get started about the last eight years.

The point is that throwing some money at the problem does nothing to solve the real problems at hand. It merely postpones the inevitable. The rebates will just about cover the shortfall in American’s need for cash this summer.Home equity extraction

There are many things we could do with $150 billion that would start to address some fundamental issues in this country. Health care, basic research, alternative energy, the profound cycle of poverty in the inner cities, encouraging manufacturing innovations.

There is also a strong possibility that this slowdown will look different from ones in the past. Because the manufacturing jobs lost in the last recession never came back, there won’t be the immediate drop off in jobs we have had in previous recessions.

Manufacturing and construction jobs

A huge boon in construction and deficit spending took us out of the last recession. This time construction will be part of the problem and the ability of the government to finance aid package after aid package will be limited. Our best guess is a long slowish period. In this case, the best use of tax dollars would be to start making some longer term investments and hold off on a desperate move like rebate checks. Legislators want to avoid the pain, especially in an election year, but we may need an uncomfortable period to make the hard decisions that will get this country back onto solid economic ground.

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