Thursday, February 14, 2008

Government Rebate Checks



(This is Kyle again) While I'm all for receiving free checks in the mail the more I learn about these government checks we are all supposed to get this summer the more I am against it. Let me see if I understand this correctly and feel free to correct me if I am wrong because I hope I am.

As americans we have managed to get our selves so far into credit card debt and other *misguided "investments" that we are headed into a recession.

On January 8, 2007, the Federal Reserve released the G-19 Consumer Credit report for November, 2006. It stated the total was $872 billion, or $2,898 of credit card debt for every man, woman, and child in the United States.

This is besides the $1.5 trillion in non-revolving credit, like auto loans. That equates to an additional $4,984 debt per person.

Simply put we spend money we don't have. So what does the government want us to do? Spend More! They are going to "give" each of us around $600 to go spend to stimulate the economy to keep us out of a recession. Now I am no economist but in my mind this isn't going to work. Maybe it post pones a potential recession.

Now granted I do not think it is the governments job to teach us fiscal responsibility
The Outstanding Public Debt as of 15 Feb 2008 at 06:15:15 AM GMT is:

$ 9 , 2 4 6 , 1 3 0 , 8 8 2 , 5 6 6 . 6 2
http://www.brillig.com/debt_clock/

I do think they should not train the American people to continue to spend money they do not have. This is no solution to an already major problem. Is this not just another example of postponing todays problems for tomorrows leaders.

All that aside here is the biggest problem with this plan. This money we are suposedly getting magically from the government has to come from somewhere. And it does... from what I have been reading, comes from your next years tax returns. For example, if a single person were to
receive a $600 rebate check from the government and their 2008 tax
return was supposed to be $900. That person would receive $300.
However, if they were to receive less than a $600 refund in 2008, the
rebate cancels out their refund, and the taxpayer would not owe the
difference.

Thanks but no thanks. Some one please explain to me how this is a good plan.

1 comment:

Dave Foree said...

Hey Kyle Gardner, long time no see! I noticed the link on your sidebar over there - thanks! Hope everything is goin' well for you - it certainly sounds like it is. Congrats on the marriage, the job, etc.

Now down to business. I couldn't resist talking about an economic topic:

You're right - the rebate is technically a bad idea. That's only if it doesn't serve its intended purpose, though, which I believe it likely won't.

The idea is to prevent a recession (potentially caused not necessarily by credit over-usage but by asset misallocation, in general - you were right when you mentioned "misguided investments.")

The basic rule of thumb for fighting off recessions is to use monetary policy first (printing more money/making it easier for banks to loan money/etc.) and then, as a last resort to use fiscal policy, AKA start spending or, in this case, rebate tax revenue.

If people increase their spending/saving/investment, the predicted recession won't happen. If they don't, it will. So the relevant question is this:

What effect will $150 billion dollars in the hands of citizens have on spending, savings/investment? Obviously, it'll have some effect, but will it be enough?

More importantly, I believe, is the fact that our politicians want to maintain public faith; they want to not only look like they're doing something but also that they have the ability to prevent a recession (because a large portion of recessions is psychological. If we think politicians can stop/prevent it, it'll actually reduce at least some of the recessionary pressure.)

Anyways, long story short:

If the rebate ends up being the final variable that prevents a recession, it'll turn out to be much, much more valuable than the cost ($150 bln). If it doesn't, it was a waste of money.

The only way, then, to have any idea whether or not the rebate is a waste is to try and figure out the probability that it will have, first, any effect at all and, second, if that effect actually contributes to preventing a recession.

Obviously nobody knows any of this, but I will make up my version of an answer: I believe that it'll help, a little, with the overall level of economic activity in this country, but the cost will outweigh the benefit in the long run. I'm pretty sure we're both on the same page on this one, too.

There's at least a small chance, though, that it'll stave off enough recessionary pressure to make the $150 billion very, very worth while.

So it could turn out to be a good plan, but chances are it's just politicians spending money to make it look like they're trying to do something.

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OK, there's my uninvited two cents.

I'm glad to see you've joined the blog world - Keep up the good posts, Kyle (and Alli) - I'm a subscriber now. :)