Friday, January 25, 2008

Stimulus Shimulus

I've been silent on the "economic stimulus" package that congress and the President are trying to push through this week to 'save' this economy from recession. What a joke.

First of all, I am somewhat against this whole package given my predilection for free markets and capitalism. However, things look gloomy, the unemployment rate is creeping up, and the many major companies are seeing slowing demand for their products.

Congress has tried to quickly act and put a package together. Bottom line is that single people will get $600 each and married couples $1200, by May, supposedly. There will also be immediate tax write-offs for 50 percent of the purchase price of plants and other capital equipment and permit small businesses to write off additional purchases of equipment.

I do like the provision for investment is important to stimulate growth. But, the whole tax rebate check thing just isn't going to cut it. I think this a ploy to buy votes. How much of this money is going to be put back into the economy? Evidence from previous tax rebate checks demonstrates that only 30% of the money gets spent. The rest is put into savings or used to pay off debt/credit cards. Economists estimate that each dollar spent on this stimulus package will only return 70 cents on the dollar to GDP. Thus, this $150 billion stimulus plan will only increase GDP by about $100 billion. On the other hand, I heard an economist say that he estimated for every dollar that is put into food stamps, it will yield $1.70. That sounds unbelievable. I tried to look this up, but could not find proof. I think, if the government really wants to "give out" money and have it ALL go back into the economy, the best thing would have been 'gift cards'. Thus, the money would get spent at merchants and pump the cash back into the economy.

On the other hand, I do think that the fed rate cuts will result in growth in the economy. However, it will probably take 6 months to kick in, at which time we may be emerging from recession on our own. To wit, the transportation index, which is a classic economic leading indicator (shipping, etc), has been beaten up for the past 6 months, but rallied significantly this past week. This could be a positive sign that the economy is not so bad. And, of note, Buffett has been buying the railroad stocks heavily recently.

And how's this for an economic stimulus....get out of Iraq and spend the trillions that we are spending there in the United States!

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