Digging deeper into debt
Last week, the IRS started the process of sending out economic stimulus payments to US taxpayers. Usually, I would be happy at the thought of getting "free money". Unfortunately, I see the stimulus checks as being terrible economic policy. The US government is deeply in debt, with out of control spending, and the government is digging deeper into debt to send these stimulus checks out. It is equivalent to an individual with maxed out credit cards taking a cash advance to buy himself (or herself) something nice just to feel good. That individual will eventually have to repay that debt, and in the same way, the taxpayers are now on the hook to repay this "stimulus".
The theory behind the stimulus is that taxpayers will use the money to continue their behavior of consumption. With an extra $600 in hand, taxpayers might buy big screen televisions, spend it on vacations, or perhaps just use it to fill their gas tanks for the next two months. These purchases would theoretically reduce financial pressures facing businesses, and depending on how much you believe in supply-side economics, might come close to generating tax revenues equivalent to the stimulus package.
The problem is, US consumers are up to their eyeballs in debt. Many are behind on their credit cards and mortgage payments. So it is possible that a significant percentage of people will just apply the money to existing debts in order to avoid debt collectors or foreclosures. Others will save the money away in order to just survive this recession. In the event that consumers take the fiscally prudent approach, the stimulus will not generate significant amounts of increased business or tax revenue, and US taxpayers will be sitting on an additional $160 billion of debt. It is ironic that the economic stimulus only works if US consumers continue with their unsustainable spending.
The stimulus package would be less objectionable if the government had reduced spending to cover at least half the cost of the package, perhaps with the hope that supply-side economics would took care of the remaining half. It would also be completely different if both the deficit and the overall debt were not excessive. The projected deficit for 2008 will be $410 billion, and the debt as of today is $9.34 trillion dollars. Even assuming a GDP for 2008 of $14.1 trillion dollars (BEA value), the deficit to GDP ratio is 2.9%. While theoretically, short term deficits are not the end of the world, with Social Security digging into the red in 2017, we can't afford to be digging ourselves deeper into debt right now.
The theory behind the stimulus is that taxpayers will use the money to continue their behavior of consumption. With an extra $600 in hand, taxpayers might buy big screen televisions, spend it on vacations, or perhaps just use it to fill their gas tanks for the next two months. These purchases would theoretically reduce financial pressures facing businesses, and depending on how much you believe in supply-side economics, might come close to generating tax revenues equivalent to the stimulus package.
The problem is, US consumers are up to their eyeballs in debt. Many are behind on their credit cards and mortgage payments. So it is possible that a significant percentage of people will just apply the money to existing debts in order to avoid debt collectors or foreclosures. Others will save the money away in order to just survive this recession. In the event that consumers take the fiscally prudent approach, the stimulus will not generate significant amounts of increased business or tax revenue, and US taxpayers will be sitting on an additional $160 billion of debt. It is ironic that the economic stimulus only works if US consumers continue with their unsustainable spending.
The stimulus package would be less objectionable if the government had reduced spending to cover at least half the cost of the package, perhaps with the hope that supply-side economics would took care of the remaining half. It would also be completely different if both the deficit and the overall debt were not excessive. The projected deficit for 2008 will be $410 billion, and the debt as of today is $9.34 trillion dollars. Even assuming a GDP for 2008 of $14.1 trillion dollars (BEA value), the deficit to GDP ratio is 2.9%. While theoretically, short term deficits are not the end of the world, with Social Security digging into the red in 2017, we can't afford to be digging ourselves deeper into debt right now.
posted by David at 5/04/2008 11:19:00 PM
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