If you really want stimulus, tax cuts are the way to go
The initial details of the stimulus package are finally making it to the media. The Associated Press is reporting that the stimulus package as drawn up by house democrats will include $550 Billion of spending combined with $275 Billion in tax cuts; a 2:1 ratio of spending to tax cuts. It is in my opinion that the ratio should be reversed with the tax cuts growing to $550 Billion with $275 billion in spending.
The United States is currently in a position where it must to something to make its other programs productive. I think the current situation is best described by this sign:
The sign is already there in the form of TARP (the sharp edges are the dangers of deficits) and now the sign needs a message (stimulus) to make the sign worthwhile.
The TARP program will remain completely ineffective unless the American consumer becomes comfortable again with buying on credit. The whole purpose of the TARP program is to expand what has become a sharply declining supply of credit and thus money. The problem is the money issued to banks via TARP will never make its way to the money supply unless people are ready to borrow again.
Now let’s consider how the American consumer shops. We don’t (but we should) base our spending off the amount of money we currently have, instead we go payment shopping for cars, houses, even TVs and sofas to find how much money we can possibly borrow and yet still struggle to make ends meet. The first question a car salesman asks you is not “what is your price range?” but instead “what would be a comfortable monthly payment?”
The best way to give Americans more money each month would be in the form of tax cuts. Lowering taxes would lower monthly with-holding and thus give consumers more money to spend per month. This discretionary income could be spent on anything, even if its just $50 per month. The thing is though that $50 per month easily finances thousands of dollars of goods especially at the current interest rate.
$550 Billion of tax cuts in the lowest tax brackets would give the most cash strapped consumers plenty of money to spend. Knowing that only 140 million people pay taxes in the United States, the average per taxpayer would be a whopping $3928. Obviously this number is skewed as the higher tax brackets are going to save way more than $3928 while lower bracketed consumers would save far less.
But the question remains, what could you do with $3928 per year? You could buy a new car!
Really? Of course! With just $327 per month you could finance a $13,000 car at a 6% rate for 4 years. What a great way to stimulate both the American consumer and the auto industry.
So what happens after the stimulus ends? Chances are the consumer boom would continue as the trillions of dollars given and lent to banks in the past year would be multiplied through the system. Would we have inflation, you bet. But are we going to have inflation anyway, you bet.
If you’re going to blow $825 Billion, truly stimulate the economy. Give people tax cuts and spend the remainder on infrastructure. The Obama administration is really missing out on the true value of this stimulus.
