8.06.2008

Bigger flops to come

The Tax Rebate Was a Flop. Obama's Stimulus Plan Won't Work Either.

Excerpt:

Those of us who supported this fiscal package reasoned that the program would boost consumer confidence as well as available cash. We hoped the combination would cause households to spend a substantial fraction of the rebate dollars, leading to more production and employment. An optimistic and influential study by economists at the Brookings Institution projected that each dollar of revenue loss would increase real GDP by more than a dollar if households spent at least 50 cents of every rebate dollar.

The evidence is now in and that optimism was unwarranted. Recent government statistics show that only between 10% and 20% of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending. This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity.

These conclusions are significant for evaluating the likely impact of Barack Obama's recent proposal to distribute $1,000 rebate checks to low- and middle-income workers at an estimated cost of approximately $65 billion. His plan, to finance those rebates with an extra tax on oil companies, would reduce investment in refining and exploration, keeping oil prices higher than they would otherwise be.

Here are the facts. Tax rebates of $78 billion arrived in the second quarter of the year. The government's recent GDP figures show that the level of consumer outlays only rose by an extra $12 billion, or 15% of the lost revenue. The rest went into savings, including the paydown of debt.


Comment: What is needed is real tax reform with 3 income tax brackets and sustained low capital gains taxes.

5 comments:

  1. Tax reform, spending cuts, border fence.....do the "Augean Stables" come to mind when you think of DC these days?

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  2. JP, do you think your counter at the home page is correct?

    "The "official" debt of the United States is only around $10 trillion dollars as of August 6, 2008. This is a manageable number; we could pay it off in a few decades if we quit buying luxuries like food and clothing, and take a few other minor economy measures. Unfortunately, the "$10 trillion" number was produced by government accounting, which among other things allows one to ignore Social Security, Medicare, and the new prescription drug benefit. This is like ignoring rent, food, and utilities in your household budget… it will lead to a few bounced checks. Our real debt is about ten times higher.

    Who says so? The President of the Dallas Federal Reserve, Richard W. Fisher. In a May speech at the Commonwealth Club of California, he states that the US national debt is close to $100 trillion. You can read his whole speech at the Federal Reserve web site."

    Hmmm, interesting.

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  3. Re: Augean Stables. I had to do an internet search to understand that!

    Perhaps global warming will raise the seas and wash up the mess in Washington.

    http://en.wikipedia.org/wiki/Augeas

    The fifth of the Twelve Labours set to Herakles/Hercules was to clean the Augean stables in a single day. The reasoning behind this being set as a labour was twofold: firstly, all the previous labours exalted Heracles in the eyes of the people and this one would surely degrade him; secondly, as the livestock were a divine gift to Augeas they were immune from disease and thus the amount of dirt and filth amassed in the uncleaned stables made the task surely impossible. However, Heracles succeeded by rerouting the rivers Alpheus and Peneus to wash out the filth.



    Re national debt: Good comments. All I know is that I don't want to depend upon the government to take care of me!

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  4. BBubba, are you implying that Washington needs to be cleaned out?

    How about this for a wacky scenario: the debt gets so bad, the dollar gets so devalued and the economy is in such a downward spiral with out of control inflation that we will get rid of the dollar and start fresh with a new monetary unit which would be akin to the Euro (Amero)?? That would be a way to flush out the old system and start fresh. I could see that happening in our lifetimes, but of course it's all wild speculation.

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  5. Anon: yup, we need Hercules to divert the Potomac across Capitol Hill.

    And for what it's worth, the actual national debt--when calculated by the accounting standards required by law for every non-government entity--is actually somewhere between fifty and one hundred trillion dollars, when you count unfunded obligations of Socialist Insecurity and Mediscare.

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