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No sooner had world stock markets started indicating that the crash was finally at hand than we saw Hillary Clinton calling for a $70 billion stimulus package. Barack Obama, not to be outdone, presented his own $75 billion proposal. And President Bush, fiscal conservative that he is, trumped them both with a $150 billion package, including $100 billion in tax rebates.
Forgetting about the actual numbers for a moment, let's think about what this all really means. As I have argued in a previous article, many of the superficially appealing but fundamentally flawed notions that we hear about the economy are based on a basic misapprehension of the nature of money.
The failure of the public and our elected leaders to understand what money really is has led to one wrong-headed policy after another. The only long-term solution is for the public to become better educated, so that they won't fall for the kind of shenanigans that the folks in Washington are hoping will convince us that the coast is clear and that we should all run out and purchase another 110" flat-screen TV.
So, let's analyze the logic of a tax rebate a little more closely. First off, let's simplify the language a little bit. Rather than call it a 'tax rebate,' let's call it what it really is – i.e. free money. The question, though, is whether it's actually possible for the government to create free money.
Since the suspension of convertibility into gold, paper currency has had no "intrinsic value". The only reason why we are all willing to give real goods and services in exchange for worthless pieces of paper is because everyone else does likewise.
The money itself has no actual value – it is simply a vehicle for facilitating the exchange of valuable goods and services.
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Comments
Re: Why Tax Rebates Won’t Work
By Michelle Kenneth, January 25, 2008 at 07:28I have a question for you, Josh. What would you think if the government told the American citizens that the money they are sending should be put away into a retirement account, which would require them to purchase stocks? Wouldn't that in essence be America investing in our economy? Wouldn't that be safer?
The government fears that Americans will use that money to pay debts. Well, shouldn't they just make the new money only transferable into purchasing stocks? To me, that would be the better answer than telling America to go spend it on stuff we really don't need.
Re: Why Tax Rebates Won’t Work
By Josh Sidman, January 25, 2008 at 16:56Hi Michelle,
That's a great question, and I think the answer will help to illustrate the basic outlines of the current economic crisis.
In short, no I don't think that compelling people to invest their rebates makes much sense right now. In fact, that would have the opposite effect of what the government is trying to accomplish with its current "emergency medicine". The only hope right now for averting a damaging economic crisis is to find a way to quickly reverse the natural economic processes which are currently under way.
While you're right in thinking that investing money is normally better than consumption for the long-term health of the economy, the problem is that investment takes much more time to bear fruit than consumption does. If the economy was fundamentally healthy, it might make sense to try to induce people to invest rather than consume, but in a situation like we're in right now, the system needs help immediately, not two or three years from now.
I think a good metaphor for analyzing economic problems is to liken the economy to a living organism and then analyze its ailments in terms of medical science. So, in metaphorical terms the government's current strategy -- i.e. putting a wad of cash in the hand of every American in the hopes that they'll run right out and spend it and thereby jump-start the stalled economy -- is the equivalent of giving a dying patient a shot of adrenaline. Its high-powered, fast-acting (but dangerous) medicine. And the only time such medicine is called for is when the patient is gravely ill. On the other hand, the measure you suggested would be like telling a patient in cardiac arrest that he needs to exercise more. You're right, exercise is more healthy than a shot of adrenaline, but this patient will be dead before he makes it to the gym...
Re: Why Tax Rebates Won’t Work
By Michelle Kenneth, January 26, 2008 at 09:05So why not invest half and spend the other half?
I'm not a big proponent of encouraging people to make more bad financial decisions, especially since we all know spending the money will not really help our economy or our own situations. Like in your example, even after the immediate medicine, you still need to make life changes so it doesn't happen again. You can't just have your immediate fix and not make the changes immediately after you get out of the hospital, because it will happen again and most times much worse than the initial heart attack.
I think our government would be wise to start learning how to manage money a little more appropriately. Perhaps we should send them Suze Orman who will deal a harsh reality check for them. (I'm just joking, but you get my point).
:)
Re: Why Tax Rebates Won’t Work
By Josh Sidman, January 26, 2008 at 21:37Yes, you're right -- the stimulus package does nothing to solve the problems that led to the current crisis. Unfortunately, it doesn't look like there's much the government can do at this point to avoid a nasty downturn.
The time for action would have been five years ago when every commercial spot on every radio show on every radio station in the country was advertising sub-prime mortgages. All you had to do was turn on your radio to know something was up. This crisis wasn't hard to see coming, but nobody in Washington had the balls to speak up when there was still something that could be done about it. Now everyone in Washington decries these evil lending practices -- they should all be ashamed. They failed the American people, and they all -- on both sides of the aisle -- deserve to be thrown out of office.
The stimulus may delay things by a month or even a year, but you're right in your assessment that pushing it off will just make it worse. We are essentially throwing good money after bad at this point.
Re: Why Tax Rebates Won’t Work
By Michelle Kenneth, January 27, 2008 at 09:35I'd be interested in hearing your take on what Americans should do when the downturn happens. I believe that right now is the time to prepare for that downturn. What can people do and prepare for if the worst happens (which it will)? Should we be using that money to stock up on food and necessities? Start leaning towards greener resources (as in mother earth)?
That's probably an article all in itself.
Re: Why Tax Rebates Won’t Work
By renegade98, January 24, 2008 at 19:01Great article. Those of us living here in the US are definitely in for a world of hurt with the prospect of very high unemployment and homelessness just around the corner. My brother and a friend had been discussing the coming economic collapse of America for a number of years and just over the last year, talked about how fast it was approaching. I joined in the discussions late, too late to really prepare myself and so I among many, may very well find myself without a job and a home. I've worked in the auto industry since 1981and have seen the better times, and now those days seem to be all but over. My so called worthless rebate will be used for something other than stimulating an economy that can't be stimulated.
Good luck America. Help is not on the way.