Tax Stimulus Package as Viagra

Once the media started talking about the economy, the politicians figured they better do something about it. Instead of addressing the systemic problems of our financial affairs, our brilliant government decided to simply throw some cash at the problem. Our never ending thirst for “quick fixes” has yielded the economic stimulus package, where eligible Americans will get a check for $300 to $600.

According to the IRS,

“the vast majority of people who file a 2007 income tax return qualify, and many who don’t regularly file a tax return may qualify as well. You’re eligible if you have a valid Social Security Number (SSN), can’t be claimed as a dependent on a tax return and have either an income tax liability or “qualifying income” of at least $3,000. Qualifying income includes any combination of earned income and certain benefits from Social Security, Veterans Affairs or Railroad Retirement.”

Some 130 million households (75% of the country) will receive these payouts, costing us (not the federal government…they don’t pay taxes, we do!) $168 billion. The first checks will be mailed this week. And then what?

As reported by CBS, a CBS News/New York Times poll conducted over the weekend shows that,

“of those expecting a rebate, half say they plan to pay bills with the extra money, 27 percent say they will save or invest it and 18 percent plan to spend it.”

So, with 50% of those polled expecting to use this windfall to pay bills and another 27% saving or investing the rebate, how can we expect any stimulus from these checks?

One could argue that paying bills will help the economy, as it frees up credit to enable new purchases. Fair enough. Saving the money does grow deposits at banks providing them with funds to loan out, with a multiplier effect. Investing is not as clear, since buying a stock does not stimulate the economy, per se, except that it does enrich the seller of that stock who may then buy something that helps the economy.

What is unfortunate about this bailout scheme is that it was intended to be spent. Back in January when the stimulus package was being developed, Treasury Secretary Henry Paulson, said,

“There are no silver bullets. But…to give money to consumers, there’s plenty of evidence–you give money to people they’re gonna spend it.”

On the eve before the first checks enter the system, that doesn’t look like what will happen.

But let’s give the politicians the benefit of the doubt for a moment. Let’s assume (incorrectly) that these checks will all be spent in our economy. Best case scenario, every check is spent on new TV’s, refrigerators, bikes, lawnmowers, clothing, side of beef, DVD’s, or whatever. For precisely the length of time it takes the checks to work through the system (probably 6 months), retailers will enjoy spikes in sales.

So how does this help the economy? It clears out stale inventory; that’s a good thing. But does it cause new orders to be placed? Probably not. Retailers will very cautious in ordering new merchandise to support the new sales levels, because (and here is the big surprise) the sales peak is just a one-time shot. So the suppliers to the retailers will not feel any benefit from the rebates.

How will these checks create jobs? They won’t, at least not in the long-term. At best, employers will hire employees to handle the sales spike. That is great for those hired, but I would imagine the job growth will be marginal at best. And then, most of the temporary hires will get laid off. How lovely!

Doesn’t this economic stimulus package sound a lot like Viagra? If a man has erectile dysfunction, he has two basic choices. He can take Viagra (or a similar short-term pill) or cure the problem–either surgically or psychologically. I am not making any value judgment of those who have ED (although I am grateful I don’t have that problem!) Clearly, if a man chooses to take the magic blue pill, he will have put off worrying about his flaccidity for 4 hours or so. But when next he has an urge to “rise to the occasion”, he will have to pop another pill. Unfortunately for the man whose penis is in a recession, he will get no stimulation without medication.

Why is our economy any different? I may be a bit slow on the uptake, but I am not wrong about this. The rebate checks are a one-time benefit, no different than a rebate check you might get from a manufacturer. Once you spend it, it’s gone. Unless you can count on an endless supply of rebate checks, you are not going to make any long-term changes in your spending pattern.

The economic malady we are in now is deeply rooted, systemic. Quick fixes will provide, at best, a temporary respite from the realities of the problem. Pop that pill and delay the need for a long-term fix.

Unfortunately, the only thing our politicians know how to do is send us pills. And we simply swallow them.