Pennies from heaven

In a grand show of bi-partisanship the House and administration cobbled together an economic stimulus plan to try to avert an economic meltdown that could possibly lead to a recession.

The plan is that 165 billion in tax rebates will stimulate the economy and turn things around. In order to come up with this lukewarm package the right had to sacrifice their key component which was making the roll back on capital gains taxes permanent. The liberals had to give up on their key to the plan, giving more money to the lowest income and non-wage earners who don't pay taxes, making this an election year handout, and turning their back on "pay-go".

Upon announcing this plan Harry Reid reminded them that the Senate will still have their say and he has plans to "perfect" it. You can count on that meaning more taxes "on the rich", such as Obama's asinine proposal to reinstitute capital gains taxes, and more handouts to non-investors. Neither of which will serve to "stimulate" the economy, it serves their socialist "Robin Hood" mentality, but it will not help the economy.

The plan as it is still includes limited handouts to non-taxpayers but this is the one group guaranteed to turn their handout right over to Walmart, injecting it directly into the economy. But this is the same effect as an athlete taking a one time vitamin B-12 shot, it gives a one time shot of energy... what the economy needs is a regimen of steroids. It needs permanent capital gains tax cuts; it needs a reduction in corporate taxes. Those are the steroids that will build value in the market and allow companies to create jobs.

Creating jobs increases tax revenue by adding tax paying employees. It also injects money into he market by increasing the number of people in 401K and other retirement savings accounts. It is a cycle that continues to contribute to strength and growth.

The main problem with the proposed "tax stimulus package" is that it will be a one shot deal and will create an artificial spike in consumer confidence. Despite the billions of dollars being thrown in the economy in a one shot deal, it will not create a single job, and the increase in consumer confidence will last as long as the rebates do, and since many will use them to pay off existing debt the effects will be minimal at best.

Demand side economic packages can work, as they did in 2001 but the rest of the economy needs to be up and running. The problem now is the consumer confidence AND the investor confidence is shaken. Something needs to be done to address both key confidence factors.
The plan as proposed will add to the inflation rate, not add to the economy. It could help however, since it will cause a spike in consumer confidence, and if reported it could lead to people believing the blip in the economy is over and hence restoring confidence. But as you can see there are a lot of qualifiers... "if, could, should, etc".

Demand side stimulus can work short time, it can help turn around a shaky economy quickly, especially when the problem is one of perception. However, supply side stimulus has been proven to work. The problem with supply side economics is the people, who help supply the economy profit, and the socialists in congress have two faults, they see people and corporations prospering and want that money, either to grow their government or to satisfy their dreams of distribution of wealth... or sometimes both. Of course the main reason behind this strategy is to build a base of voters dependent, or otherwise beholden, upon the government.

The drop in the stock market is caused by shaky confidence on the part of investors... if a stimulus program does not address this the economy will limp along unless the bargain hunters swoop down and drive resurgence. The country has just experienced 5 years of unparalleled growth and prosperity; it was shaken by a few random events and quite possibly greed on the part of the investment community looking for an even lower prime interest rate. Although the lower prime means lower ARMs and other adjustable loans, it also means higher returns on fixed rates.

One overlooked aspect of this economic downturn is that it is a worldwide correction… most major international markets have lost 20% and more of their value, the US market is down around 15%, so we are doing better than most other markets. A simple demand side cash infusion may help avert a recession, but it alone will not guarantee results, what holds more promise is corporate and investor tax relief to help stimulate long term growth.

Job creation and building the tax base will work; a spring visit from Santa only addresses one piece of the puzzle. But with everyone rushing to put a plan in place and more importantly, take credit for it in this election year, no one is taking time to look at the big picture.

Playing politics with the economy is a foolish mistake and everytime it has happened in the past the problems are delayed, such as Jimmy Carter's malaise, and FDR who extended what should have been a two year recession into a decade of misery.