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To Stimulate Or Not To Stimulate?

by The Happy Rock on May 12, 2008

stimulus-check-burned.jpgThe Happy Rockette mentioned something about our stimulus check that got me thinking. We already have a plan to spend the money on some improvements to the condo. We can enjoy then for the next year our and they will help our house sell when the time comes. I mentioned that the $1500 would look pretty nice in our down payment account, and she hinted that we should use the money for its designed purpose….to stimulate.

She was being somewhat tongue and cheek to counter act my subverting of the plan, but until that moment I hadn’t considered that people might feel obliged to spend money to ‘help’ the economy. In my opinion, the money was ours not the governments and we are free to do whatever we chose with it. This includes paying consumer debt, if we had it, or even throwing it under the mattress. Is it our patriotic duty to spend the money? Will it even make a difference? Thought-provoking questions.

To help answer the question I did a little digging into what kind of effect stimulus payments can have on the economy. Here are a few quotes from the Congressional Budget Office(CBO) on the matter :

“Most studies of purely temporary, one-time changes in taxes have suggested that they have only a moderate effect on household consumption,” the CBO said, noting studies of a rebate issued in 1975 “suggested that only 12% to 24% of the rebate was consumed in the quarter that it was received.”

CBO said though “the experience of the 2001 tax rebate appears to differ from the findings of these earlier studies.” CBO noted the 2001 rebate was part of a broader tax package which lowered tax rates and applied those reductions retroactively. In 2001, most households received rebate checks of either $300 or $600 from late July 2001 to the end of September 2001 during a recession.

“Most analysts agree that the 2001 rebate stimulated the economy,” CBO said, “although there is some debate about the magnitude of the effect.” Households, according to one study, spent between 20% and 40% of their rebate amount in the quarter in which the rebate was received.*

So it looks like there is potential for the stimulus checks to infuse economy with a little money, but there is plenty of debt as to whether our government borrowing money to give to people to spend will do anything to truly stimulate the US economy.

So the question remains stimulate or not to stimulate, what’s your answer?

*Source – The Winners and Losers of the Stimulus Package

{ 4 comments… read them below or add one }

Double Eagle May 12, 2008 at 8:26 am

The way I look at it is, the $600 I got back was a small fraction of the tax I paid in 2007. It’s my money (again) and I’ll spend it how I see fit. If that doesn’t improve the economy, then the powers that be will have to figure out a new plan of attack.

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andy May 12, 2008 at 2:35 pm

It will only make a minor difference which will most likely be reflected in same store retail figures next quarter. I recently did a post on this topic (featuring a video interview from youtube) and it looks like a number of people will just save the stimulus – not what the government wants. Also, the governement is hoping that the multiplier effect takes place so that the $100 billion has about $500 billion worth of impact. Let see what happens…

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Dean May 12, 2008 at 8:30 pm

Not sure if I’m getting the stimulus, but I’ll probably be a good drone and spend. :)

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Renovation May 13, 2008 at 6:11 pm

$600 is not the savior Congress and Bush hope it will be. Fixing the banking system will be the key. Unfortunately, we have created a shadow banking system with investment banks that is unregulated and difficult to police and regulate in its current form.

The next president will need to balance flexibility with regulations to help move the banking system into the 21st century.

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