A Tax Rebate Won't Fix This Mess
When you hear a number like $100 billion (the amount Bush is proposing to give back to people in the form of tax rebates, at about $800 per adult family member) or $145 billion (that $100 billion, plus another $45 billion in business tax breaks-mostly accelerated deductions for capital investment) bounced around, it sounds like a lot of dough, and you might think it would be a good shot in the arm for an economy that is falling into a dead faint.
But let's think about it on a micro level.
What would my wife and I do with an extra $1600?
Well, to be honest, that's not quite one month's mortgage payment.
If we were smart, we'd probably use it to pay down some principle on our credit line, which would over time get us out from under on that dreaded monthly bill a lot sooner. But if we did what most people are likely to do -- pay off some bills with it, or one month's mortgage, chances are, given how hard we're all working just to keep going, that we'd then slack off somewhere else just to catch a little break -- maybe turn down one assignment, or if we're on an hourly job, turn down some overtime and catch a little more shuteye -- and in the end, we wouldn't be adding anything to the economy at all.
But then there are the cars. They both need servicing. The Volvo, a 1993, is suffering from a case of electronic lock collapse syndrome: the right rear door can no longer be opened. It's frozen in the locked position. The lock button on the driver's door came unconnected from the latch mechanism inside the door too, so that door has to be locked and unlocked from the outside with the key. And I figure it's only a matter of time before some of the other doors get frozen in locked position, which could get really ugly when I need to drive with more than one passenger. So I could use probably $1000 of that rebate to get that mess fixed. That would leave two alignments, two tune-ups and me $600 for new tires.
If I were to do all that, I suppose that would be a little boost to the economy, but not much. It certainly would be nice for the auto electric shop guy, but it's not going to do much for Detroit. Trust me-that extra $1600 is not enough to tempt me to go out and buy a new car. Heck, it's only about a down payment and two monthly payments on some piece of junk from the bottom of the Chevy or Ford line-up, and after that I'm stuck with payments for four more years. No, I'll be staying with my old Volvo and the 2001 Honda Civic.
I suspect most Americans are in the same boat. If you have to worry about the future of your job-in my case a continued flow of assignments from various magazines that keep me afloat -- you're not going to go out and buy some big-ticket consumer item just because you got an unexpected $1600 check from Uncle George in Washington.
Economic theory, regarding the "velocity of money" and all that, says that if I do get the Volvo door problem fixed, and if I do buy those new tires and get the cars tuned up and aligned, that money I spend will flow through the economy, making everything hum a little better (not the tires though, since they're probably made overseas so the extra dollars just get lost to the US economy). That's probably true to a point. The auto electric guy is likely to get a little pick-up in business-mine and other people with door and light problems they've been living with for a while. But will it be enough to convince him to go out and hire another employee? I doubt it. Will he invest in new equipment? Nah. I doubt he'd do that, and even if he did, it most likely would be imported too, meaning an end to the stimulus chain. More likely, he'd take his extra dough and go get his pick-up repaired. It's belching a bit of smoke these days, and looks like it could use some engine work. But again, I doubt that he'll be ordering a new F-150. And any parts he buys for his vehicle are likely to be imported too, thanks to globalization. That'll be good for Mexico's or China's economy, but not for ours.
Besides, the thing is, we all know that those IRS rebates are a one-off thing. It's not like they're going to make this a regular yearly surprise. So you'd have to be an idiot to take the money and pump up your life-style.
And then there's another problem. By adding another $145 billion to the budget deficit, the government is contributing significantly to inflationary pressures, and when those gnomes in Zurich, London, Tokyo and Hong Kong see that, they'll bid down the value of the dollar even more. Our once mighty currency, now worth only half a pound Sterling in Britain, or just over 100 Yen in Japan, is shrinking faster than the polar icecap. And that means that all the products we depend on-our tools, our dishware, our clothes, much of the food we eat, and of course our oil will get more expensive.
I don't know about you, but my wife and I spend basically every penny we earn each year, in order to make ends meet. Now some of that is for stuff like mortgage payments, tuition payments, etc., but I'd guess that, counting oil and energy bills, probably half our income goes to buy things that are imported, and that's probably roughly true for most American families. After all, almost nothing is actually made in the US anymore, and we even buy a lot of raw materials -- iron, oil, etc. -- from overseas. So if for sake of argument and easy math, we're making $100,000, that's $50,000 being spent on imported stuff. Now here's where things get a little speculative. But suppose that having the government add another $145 billion in red ink to the federal budget leads to an extra 3 percent decline in the value of the dollar against foreign currencies-a not unreasonable scenario. Why, that would mean that the $50,000 I spend on foreign goods in a year would cost me an extra $1500 -- just about the same amount as that $1600 Bush is proposing to lay on me.
But...that weakened dollar will continue into next year and beyond, while the $1600 rebate is a one-time thing.
So what do we get out of this rebate thing?
Worse than nothing.
There is, unfortunately, no free lunch.
In fact, it's worse than that. To the extent that the extra decline in the dollar puts pressure on the Federal Reserve to take some action to prop the Greenback up, we will see interest rates rise. Now at the moment, we're in hock to the tune of about $25,000 on a home equity credit line-a result of living beyond our means that is the typical American family's response to incomes that have failed to keep pace with inflation. While my mortgage is fixed-rate, my credit line is not. So if the fed raises interest rates by .25 percent to prop up the dollar from the effects of that one-off tax rebate, I'm going to be paying an extra $650 annually in interest on my credit line balance.
In other words, this rebate is putting me into the hole right from the get-go!
Thanks a lot George!
So how about we just forget this whole stinking rebate idea. It ain't gonna work, folks. It might sound good in an election year, but if you look at it closely, you can see it's really just smoke and mirrors.
There is a solution, though. How about if they end the war in Iraq and bring all the troops home. The government will save several hundred billion dollars a year that's being spent overseas blowing things up -- and that is helping to depress the dollar and raise our tax bills. Some of that saved money can help reduce the deficit. Other chunks of it could be invested in America's badly decaying infrastructure-repairing bridges, building new schools, etc., maybe building some major levees to protect our coastal cities from the next Katrina or from the global warming flood that we know is coming. And all that will mean jobs for people who need them.
We might also try to do something about reducing that massive outflow of dollars that's making our currency do a disappearing act. An easy way to do that would be to slap higher taxes on gasoline and to tax cars based on how bad their gas mileage is. Before long, most Americans would be driving less and buying smaller, fuel-efficient cars, and we could significantly reduce the single biggest item on our import bill: oil.
Don't get me wrong. I'll be happy to get that $1600 check George Bush is calling for. I'm certainly not going to return it to the Treasury! But let's not be pretending that it's going to jump-start the sick economy.
It might even end up making things worse.