Congress to Pass Stimulus Package While the Band Plays On

stimulus package.jpg

Fears of recession combined with an election year equal a chicken in every pot. The chicken that congressional leaders and the White House cooked up yesterday will cost our grandchildren about $150 billion plus interest. That’s right, the government is passing out money to the tune of $600 to $1,200 for most taxpayers in the form of one-time tax rebates. Here are the details:

Onetime Tax Rebates

Individuals

  • Receive up to $600
  • Rebates are reduced for individuals earning $75,000 or more
  • Rebates are eliminated once earnings reach $87,000

Couples

  • Receive up to $1,200
  • Rebates are reduced for individuals earning $150,000 or more
  • Rebates are eliminated once earnings reach $174,000

Families with children receive an additional $300 per child and the income caps are higher. And those who don’t make enough to pay taxes would still receive $300 if they made at least $3,000 in 2007. Changes to depreciation and expensing rules for business were also included, aimed to spur investments.

Housing Rescue

Perhaps the mast significant feature of the stimulus package is the change made in the mortgage industry. Today, Fannie Mae and Freddie Mac can buy mortgages up to $417,000 in value. The Federal Housing Administration’s limit is $362,000. What that means for home buyers is that any loan above these amounts will come with a higher interest rate. In the industry, a loan that falls within these limits is called conforming, one that is too big is called a jumbo. The interest rate spread between a conforming loan and a jumbo has grown since the credit crisis begin last year, and is now over 100 basis points. The stimulus package would raise these limits to about $730,000 in expensive areas of the country.

What does all this mean?

The stimulus package underscores why the economic future of our country is so dim. We’ve come to a point were we believe 4% unemployment, 2% inflation and 5.5% mortgage rates are an entitlement. I understand that some people are hurting financially. Some people are always hurting financially. A $600 check won’t solve their problems.

And the fears of a rescission are misplaced. A recession is a lot like a fever. It may not be comfortable, but it’s there for a reason. It’s an indication of an underlying problem. You can take aspirin to reduce the fever if you want, but the problem won’t go away. And in fact, the fever can help combat the problem. And so it is with a recession. Frankly, I think we need a recession in this country.

What we are hearing from our politicians is frightening. Here’s President Bush’s take on the whole affair:

Letting Americans keep more of their own money should increase consumer spending and lift our economy at a time when people otherwise might spend less.

God forbid we spend less. And not to sound partisan, here is Senator Clinton’s view of why we are in a financial mess:

Our economic problems are complex. But there is one thing we know for sure: the problem with our economy is not the American people. Instead, the problem is – in part – the bankrupt ideas of President Bush and the Republicans that rewarded the few and left so many people to fend for themselves in a time of great change.

No reason to blame ourselves when we can point the finger at somebody else. Besides, taking responsibility for our actions is no fun. All of which leads me longing for a President who might share this perspective:

And so, my fellow Americans: ask not what your country can do for you – ask what you can do for your country.

My fellow citizens of the world: ask not what America will do for you, but what together we can do for the freedom of man.

But returning back to present day politicians, there was one who actually said something sensible:

We can’t borrow our way out of this. The jig is up.

And to think I actually agree with something Mayor Michael Bloomberg had to say. I guess he’s right, the jig is up.

Reader Response: Is the proposed stimulus package the right move?

Published or Updated: October 19, 2011
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. What!!!
    Insolvency can’t be cured with liquidity???

    surely you must be mistaken.

  2. KMC says:

    Right. On.

  3. WealthBoy says:

    I think you’re right in that the stimulus package isn’t going to help those already in trouble. $1,800 is a nice little bit of cash for a family of four like mine, but it isn’t earth-shattering. For those who bought homes (declining in value) with 100% financing on a 3-year interest only loan, it isn’t going to help either.

    I also agree that we need something “bad” to turn things around, but I don’t think it will be a recession that will help. A healthy measure of inflation is what we need. As much as the U.S. imports, the falling dollar will provide for some inflation as will falling interest rates.

    For a family in the situation I described earlier, a higher income and a lower mortgage is the only thing that is going to help them earn enough equity to eventually refinance into a fixed mortgage or have enough cash on hand to sell at a loss. If a recession causes a reduction in the household income, it could mean disaster for that family.

  4. Most people will use this money to increase their assets. I’ll use it to decrease my liabilities.

    Those “assets” won’ be worth much 2 weeks later anyway, but the lack of liabilities goes on forever!

  5. Deamiter @ handlingfinances.com says:

    Very well said! I especially hate when people complain that the working poor who don’t pay taxes are getting rebates as if the method (tax rebate) is somehow equal to the goal (economic stimulus). As a guy in the top third of the income range for the rebate, I know I’ll be saving 100% of my rebate. In the process, I’ll be increasing domestic spending MUCH more in the long run than just $1200 today!

    Anyway, enough complaining — as I see it, the government just gave out a free loan since we’ll have to pay it back eventually. I think it’s stupid, but if the goal is to keep the stock market higher, it’ll probably work in the short term.

    Also, I love the plug for Bloomberg… I’m so undecided this year I think I could actually consider a decent third party candidate (though I haven’t put any effort into researching Bloomberg as he’s not a candidate).

    Anyway, great comments.

  6. David says:

    Yea it’s a great move – if you like the government to spend even more money that they don’t have in the first place. ;-) Terrible idea.

  7. TMac says:

    DR, I think you are spot on with your analysis. An extra grand in the pockets of americans will only spur the purchase of more chinese made products and in turn will result in the chinese financing more of the indebted american lifestyle.

    I think we need a recession – something radical needs to happen to reinstill the discipline in the people of this county from living beyond their means (this goes for the federal government as well).

    Cheers,
    TMAC

  8. TC says:

    Rebates like this don’t work, they’re bandaids. It’s a shame people will just buy more crap with it.

    I made a plan that if Americans spent less than $250 of the rebate we could end up with our economy in much better shape in the long run.

  9. SoftwareEng says:

    Economic Malady – Stimulus Insufficient

    The underlying problem with the economy is an extreme maldistribution of income between the working class and the capital owners. When a CEO can make 300 million dollars while an average worker’s wages haven’t even kept pace with inflation what results is a dysfunctional market economy starved for consumption spending. The average American has had to fuel his/her spending with debt obtained by borrowing on the equity within their home – that phantom equity has now evaporated.

    In order to correct this out of balance condition there needs to be laws in place (similar to the anti-Trust legislation) that caps the annual income of all capital owners and their surrogates (CEOs, CFOs, etc.) at a specific federal percentage above that of the highest paid worker within their respective firm. Also, we need to eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.

    Essentially, FDR was accurate when he characterized the Great Depression as an out-of-balance Economic malady. Rural income prior to the Great Depression was significantly lower than urban income, now (overvalued home equity) as then there was unlimited amounts of overvalued phantom equity flowing into the stock market, the income differential between labor and capital while nowhere near the current astronomical level was still much higher than sustainable. There in lies the root cause of the out-of-balance condition that precipitated the Great Depression. Any system including the market economy that gets to far out balance does not function properly. Certain constraints need to exist to keep the market economy from slipping into a dysfunctional state. Balance is the essence of stability nothing short of this will guarantee permanence.

    John Maynard Keynes –
    ?? If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes its effects in increasing the propensity to consume is, of course, all the greater.
    ??Aggregate consumption depends mainly on the amount of aggregate income.
    ??Consumption – to repeat the obvious is the sole end and object of all economic activity.
    ?? We cannot, as a community, provide for future consumption by financial expediants [stocks, bonds, 2nd mortgages on home loans, etc] but only by current output.
    ??Capital is not a self-subsistent entity existing apart from consumption.
    ??Consumption is directly tied to the level of employment.

    My Proposed Program
    • 2 year 800 billion emergency Infrastructure Investment Jobs Creation Program (IIJCP) aimed at building new interstate highways, mass transit systems, schools, bridges, public hospitals, libraries, and assorted public buildings.
    • Eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.
    • Taxation of corporate profits in the amount of 95% for firms that exceed a threshold level of jobs outsourced to a foreign country.
    • Taxation at the rate of 80% on individual yearly income received from any corporation, not-for-profit organization, or any form of legal entity where the total income exceeds the U.S. average yearly median individual income by 200%.
    • Fair trade agreements that ensure nations will offer decent wages, humane working conditions, and sound environmental policies.
    • A nationalized health care system for all U.S. citizens.
    • An effective federally funded tuition assistance program for U.S. citizens targeted at professions in demand.
    • Repeal all legislation that inhibits the right’s of individuals to organize under labor unions regardless of position or any other currently disqualifying classification.

    My Observations:
    • An economy can only function when a large proportion of the populace is engaged in the economy thus able to purchase what is produced.
    • If price is inelastic and labor remuneration static demand will fall due to reductions by industries in their capital base (the most important being labor).
    • Firms forced to compete (those that are not oligopolies) in an economic environment where demand is declining will still compete on price but efficiency gains and operating cost reductions by nature have marginal declining utility whereby a point is reached when the firm’s factors of production (land, labor, or capital) must be slashed. These cuts in factors of production will have a multiplicative effect throughout an economy resulting in an ever building ‘wave’ of economic decline.
    • It is important to keep in mind that an economy cannot continue to grow when long-term consumption continues to decline. This in turn ties directly to reductions in the factors of production to accommodate continual long-term reductions in consumption.
    • When geographical barriers, constraints to the free flow of labor resources, underemployed resource utilization, similar knowledge distribution across all nation state’s, and nation state governmental inconsistency exists no global free market can exist and thereby at the nation state level no significant corresponding opportunity cost for engaging in one form of economic endeavor over another.

    • DR says:

      SoftwareEng, I couldn’t disagree more. In fact, your suggested proposals would spiral our country into the greatest depression the world has ever seen. You write, “The average American has had to fuel his/her spending with debt obtained by borrowing on the equity within their home.” No, the average American has CHOSEN to do this. And your fear of foreign investment, both of people and money, is misplaced. While this sentiment plays well with some, closing our borders to workers and investment would be a major blow to our economy and the world economy. Globalization is a reality, and with the exception of oil rich nations, those that have closed their borders to foreign investment have been punished economically. In effect what you propose is socialism and isolationism, and God help us if we ever go that route.

  10. Blake says:

    I’m an 18 year old college student, and I won’t be getting a rebate (although I think my parents will get $300 for me, yippee!). I personally won’t even get a dime out of this but I will be among the future generation that is saddled with this enormous mess. Go ahead Washington, bail everybody out that made stupid decisions, and keep passing that debt along.

  11. Shawn@MoneyBrick says:

    Of course only Michael Bloomberg is the only politician to have said something sensible! He’s actually a business person, after all – it’s what he understands.

    I totally agree with everything you say in this post! Totally, totally.

    But, you can’t really blame the politicians for saying all this balderdash. Let’s say they really did understand the issues; they can’t just go around telling the truth to the voting public who wouldn’t understand and would just get mad (and not vote for them!).

    I saw on CNN just today, how they went to Target and Wal-Mart and were interviewing people on how they were spending their tax rebate. It was madness! Instead of saving the money… these people were buying toys, trinkets and baubles! Then, CNN went on to say how even though retailers are benefiting… it is also evil foreign countries that benefit.

  12. Shawn@MoneyBrick says:

    I’d like to add to DR’s scathing commentary of SoftwareEng’s comments. John Maynard Keynes was proven to be totally wrong in his economic analysis of the situation and possible solutions to the Great Depression.

  13. Kristina says:

    Could someone let me know if these “rebates” are similar to 2001 where they are just an advance on 2008 income tax liabilities or if they are a rebate of 2007? I disagree with the principal in any case, but if they will be included on the 2008 tax return, I think that someone should be expressing this!

  14. Jason says:

    I am also wondering if this is and advance on our 08 taxes…Wouldn’t that be so government like…Although they say it is a rebate, which inclines me to think the money is from the taxes we paid for 06 and claimed in 07…What’s the real deal?

    • DR says:

      Jason, it is a legitimate rebate, but of course it simply means the government will have to borrow more money to meet its obligations. Eventually we’ll pay for it, it’s just a question of when.

  15. Levon says:

    To really help people and economy is refinance all loans at 5.5% with no any closing cost. Freeze that rate for a few years, and drop the gas prices. Fed drop the rates but everybody knows it will have little effect on American regular citizens to get a cheap loan. It will have only effect on banks’ ability to make fat profits

    • DR says:

      Levon, the problem is that if the government were to move in and set interest rates and gas prices, the market economy would go into a tailspin. As difficult as times may be for some, history shows us time and again that messing with the market produces very bad results.

  16. Jim says:

    This latest bailout package has the United States more in line with Communism than Capitalism.

    But as usual, is the middle class tax payer who will be footing the bill for this nearly trillion dollar fiasco.

    You can’t continue to print money based on nothing but thin air for decades on end as the privately held Federal Reserve Bank has done, without eventually destroying the value of such currency.

    This latest bailout package will not work and is just a further incentive for the wealthy to corporations to continue to take further risks since they realize that the American Proletariat will always foot the bill for it.

    • DR says:

      Jim, I agree that many of our policies and those of Senator Obama move us closer to a European democratic type socialism. I’m more sanguine on the bailout plan, but you’re right, we can’t keep printing money without consequences.

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