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Monday, April 28, 2008

'Tax Rebate' checks expected to yield short term benefits, long term troubles

So, the first rebate checks go out today, the first of 152 billion dollars in rebates.

What is the impact here? Will this actually do anything to fix the economy?

I (and the article linked) fail to see that it will make a difference.

For one, most people don't plan to spend it- more to the point, they have ALREADY spent it, as many plan to use the rebate to pay down debt. Several sources expect that less than 25% will actually spend their rebate checks.

I find it objectionable that the implication continues to be that it is patriotic to spend money and bail the United States out of a recession, at the expense of personal stability. Isn't this the same message that got us in trouble in the first place? This is a recession built on the back of irresponsible spending, and we need to spend MORE to get out of it?

This is also inflationary- we have a huge pile of money dumped into the economy, with which to buy the same amount of goods. Inflation is a looming threat, and prices are increasing almost across the board due to input shocks as fuel prices skyrocket. Throwing more money onto the bonfire doesn't seem prudent, and inflation is much harder to correct in the long run than economic growth.

As the article states, inflation may not be a short-term issue as the credit crunch is creating a slow in the velocity of money- the banks that have taken it on the chin for 10 months now have to hold more in reserve for portfolio losses. Still, that situation will eventually reverse, and when it does, the money being dumped into the economy will only exacerbate the other inflationary issues (low interest rates, gasoline prices, etc).

So what are better options?

I hate to say this, but I think if the government really wants to spend out of a recession, they should directly do the spending. At least there all the money would actually be spent, providing more of a boost. If I am going to have to repay this in the future, I would like to think that it actually improved the economy instead of simply helping somebodies bank account.

However, I think the better response would be to try to reverse the velocity issue and strengthen the banks. Our economy would be better served if the financial industry was healthy and money was cheap to lend, and this should have less inflationary impacts. Unfortunately, it looks like the opinion in government is leaning the other way, seeking to punish banks (on top of the punishment they have received from making bad lending decisions) instead of helping them rebuild.

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