October 21, 2009

Administration about to double down on failed Stimulus Strategies

by Hal Gershowitz

Comments Below

Last April we predicted in an article published in the “Washington Business Journal” and later republished by the American Enterprise Institute’s on-line journal, “The American,” that the Obama administration’s stimulus bill then about to be passed by Congress, would fail. It has. We argued at that time that there were relatively few so-called shovel-ready projects and that the federal largess would be a long time coming to local communities. And it has been. Most of the funds authorized by the stimulus bill that had to be passed “without a moment to spare,” are still tied up in the federal bureaucracy. It is probably just as well, as this exercise in federal allocation of resources is a clumsy and ineffective way to stimulate the economy. We also wrote that the expensive rebate program first initiated by President Bush and repeated by President Obama would do very little to stimulate the economy because it would be seen as a temporary band aid that would either be largely socked away or used to pay down some consumer debt. Its impact at retail turned out, as predicted, to be negligible.

Then, of course, there was the ridiculous August Cash for Clunkers program whereby over a billion taxpayer dollars were essentially wasted enticing likely September automobile purchasers to buy in August. The historic and highly predictable sharp year-to-year auto sales decline for September 2009 compared to September 2008 illustrates just how lame this congressionally inspired stimulus plan was. Now, with mixed signals about whether the economy might recover, albeit very slowly, without further Congressional action some politicians in Washington are talking about either a new or extended stimulus plan. We believe that with the accumulated deficit and total US debt as another looming crisis it would be better not to double down on a further stimulus plan.

The fact is that the economy can best be stimulated by simply encouraging its various facets to function normally. The marketplace will allocate resources far better than the government. However, if Congress, in an election year, is going to opt for more stimulus we believe our original plan has far more merit.

We proposed last April, and re-propose now, a three year tax credit for consumer spending on durable goods such as furniture, fixtures, and automobiles, the kind of big ticket items that would not only help the nation’s retailers but would pass through to our factories as well.

The happy talk coming out of Washington that the recession ended way back last summer, which may be technically true, does not reflect any improvement in the lives of everyday Americans. It simply tells us that inventories have been slowly whittled down. Production has increased, not to meet surging sales, but to replace inventories that have, over the last year-and-a-half, been slowly depleted. Inventory depletion is a normal phase of every recessionary cycle. That inventories are dropping while the ranks of the unemployed are rising is of little comfort on the streets of America. Furthermore, these inventories would have diminished during the past year with little or no stimulus spending.

Meanwhile, the effect on the economy of continued layoffs month after month depresses both the economy and the American psyche. Last month’s sharp jump in lost jobs to 253,000 was startling. No one, it seems, informed all of the businesses that cut those jobs that things were improving and that the recession was over. It also illustrates that there are limits to how much the economy can be “jawboned” back into robust activity. Real economic growth occurs only when millions of men and women collectively make millions of market-based decisions to engage in economic activity; to assess their needs and desires, to make purchasing decisions and to go into the market place and acquire what they need or desire. That is why we need to create real demand at the consumer level to turn loose a sustainable economic recovery and we believe now, as we believed last Spring, that we can accomplish this quickly and efficiently. Now is the time to encourage the ninety percent of workers who are employed to energize the economy by providing an inducement for them to buy whatever they need wherever they choose. Give Americans the latitude to allocate their purchasing power in the marketplace as their needs dictate.

There is a simple and efficient way to reenergize the consumer. Provide a consumer tax credit for spending on durable goods such as furniture, fixtures, automobiles and other consumer products; the kind of big ticket items that will not only help the nation’s retailers but will pass through to our factories as well.

Here’s how it might work. Retail purchasers would get a dollar-for-dollar matching tax credit on each purchase he or she makes up to a permitted maximum for each taxpayer which, for joint return filers, might be $7,500 in year one, $5,000 in year two, and $2,500 in year three, and half that for individual filers. Upon the purchase of qualifying durable goods the Seller would provide the Purchaser with a special form of receipt which would be submitted to the Internal Revenue Service for an immediate tax rebate for fifty percent of the purchase amount up to the taxpayer’s individual or joint limit for that year. This approach could also be applied to down payments on new home purchases, automobiles, dishwashers or anything for which there is real pent-up demand. Those filers whose taxes due are insufficient to utilize the entire credit in any year of the program would have the credit carried forward in each successive year until the entire tax credit is realized by the taxpayer The rebates and credits would be accounted for on each taxpayer’s annual Form 1040.

We estimate that such a tax rebate or credit would amount to far less, spread over three years, than we’ve spent and are about to spend on stimulus packages even if every taxpayer was able to make full use of the credit, which of course would not be the case. However, this theoretical outflow would be substantially, perhaps totally, offset by the almost immediate influx of business tax payments which would result from the increased commerce and business investment as demand surged, as well as the substantial jump in personal income tax receipts to both the federal and state governments from taxpayers who transfer from the unemployment line to the recruitment line. State and local sales tax revenues would also surge.

We have seen that the current economic crisis which resulted in gigantic federal appropriations gave legislators from both parties a type of cover to quietly enact a grab-bag of their favorite programs and to earmark a substantial portion of the money on the equivalent in their districts of the legendary bridge to nowhere without publicly debating the merits which budgetary restraint and legislative compromise would otherwise require. The beltway speak that a crisis should never be wasted should be seen for what it is…an opportunity to impose new federal programs on a frightened and unsuspecting public. We must guard against such further partisan opportunism. Stimulus programs should be about economic stimulus and nothing else.

A consumer tax credit as we have proposed would have one very strong advantage over government attempts to allocate resources in an effort to stimulate the economy. Every dollar of a consumer tax credit would, by definition, be the result of a one hundred percent, dollar-for-dollar, consumer-driven investment into the economy as taxpayers buy goods to qualify for the credit. Legislative logrolling or earmarks would not be possible if we stick to this simple approach. It is efficient, uncomplicated and relies totally on the people to make decisions about how and where they allocate their economic resources. We realize that efficient and uncomplicated solutions to problems are not de rigueur in Washington, but isn’t this time supposed to be all about change –change we can believe in?

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8 responses to “Administration about to double down on failed Stimulus Strategies”

  1. Susan Good says:

    I so enjoy reading your site.
    Thank you for your dedication.

    Susan

  2. Jerry Kessler says:

    I have read with great interest this report. Although I generally concurr in what you have said and are proposing, I believe the concept of a stimulus for buying products (ie cars, furniture etc) and getting a 100% tax credit limited to $7,500 in year one and less in two future years, is excessive and would produce substantial negative results. Specifically I believe this would lead to massive retail spending that is unwarranted, and even with a tax credit, unafordable too many families. Such purchases would still likely be purchased via a credit card and could, and in my opinion would, lead to alarming credit payment deficiences, which in fact is what is happening today. I believe that when you buy something, the buyer should still have at least some financial committment to the purchases-meaning a credit would be great, but a 100% credit would create more problems than it would solve.
    Perhaps a 50-75% credit would be warranted-and even then perhaps that amount should be paid to the vendor, when purchased, rather than through a tax refund claim which can only come once a year.
    Also many people whose credit limits are already extended may not be able to participate in the program as an eventual future tax credit (rebate really) won’t necessarily allow a person to buy.
    Just my thoughts-the idea of an incentive is great but perhaps “too great”.

    • “Upon the purchase of qualifying durable goods the Seller would provide the Purchaser with a special form of receipt which would be submitted to the Internal Revenue Service for an immediate tax rebate for fifty percent of the purchase amount up to the taxpayer’s individual or joint limit for that year. ”
      Our proposal provides a tax- credit equal to 50% of the purchase price. We could have made this point more clearly and we thank Mr. Kessler for calling the confusion to our attention.

  3. mkaback says:

    How did Barney Frank and colleagues respond to this suggestion? It would be great to hear their responses.

  4. Tom Autry says:

    Nice proposal, but we all know that tax breaks, tax credits, tax rebates will never be discussed by this Congress. The Administration and Congress are not interested in allowing the consumer to make decisions on where to spend their money. Why should they when they can funnel our tax money down the hole of their choosing. I recall a statement by the great Al Gore during one of Bill Clinton’s campaigns. When asked about tax breaks for the American People he responded (I think I have this right) “We would be glad to give the American People a tax break if we thought they would spend it where it needs to be spent”.

    They want our money so they can spend it where it needs to be spent.

  5. Seymour Kreshek says:

    I very much enjoyed reading your proposal, although it is too straight forward for our political leaders in Washington. How would you propose structuring the rebates or credits to encourage the purchase of domestically produced items thereby creating domestic instead of foreign manufacturing jobs.

  6. Robert Myers says:

    Great idea, but I’ve always considered savings to be more important than spending. Spending creates jobs to be sure, but savings allows people to coast through the rough times and at least pay their bills. After people feel comfortable with enough of a savings cushion in the bank account, they will spend and create jobs. Adequate savings would make us recession-proof.

    Christmas season is upon us. Every year the MSM tries to convince us that our entire economy is based on how much Chinese-made junk we can buy in December. Save your money instead.

  7. Richard says:

    Sounds very similar to a consumer tax, aka, the fair tax. Perhaps the combination of this proposal, and the extreme simplifying of the tax code, such as a flat tax, would do more than just get us out of the current economent doldrums. It might even be the begining of paying down on the national debt.

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