and the
Citizens Economic Research Foundation

Barbara's Column
January #5

Economic 'stimulus' may create more problems than it solves
by Barbara Anderson

The Salem News
Thursday, January 31, 2008

I had just tripped over my kitchen floor again when I heard the government wanted to give me an $800 tax rebate.

My first thought was maybe I can use it to replace the ancient vinyl with the holes that my toes get caught in. My second thought: Where is my government going to get the money for my rebate?

I didn't study economics in college. The books I've read on the subject have mostly contradicted each other. Until I "get" what the government financial geniuses seem to know, I live by the principles my father taught me:

1.)  Don't spend what you don't have;

2.)  Save; and

3.)  Borrow only for major expenditures if you are reasonably sure you'll have enough money to pay back the loan with interest.

I do know enough to answer my own question about the tax rebate. The money will come from taxpayers like me, or from whoever loans my country the money, which will add to the national debt that my grandchildren will inherit.

Fortunately I didn't rush to order the kitchen floor, since the proposed amount for single filers like me dropped to $600 in the House bill. But if the economy is so bad that the government wants to increase the national debt for a "stimulus package," maybe I can get a good deal on the flooring.

So where did my other $200 go?: In the final House "compromise" it goes to low-income people who don't pay taxes.

Then how can the government call it a rebate, which Webster's defines as "a return of part of an amount paid, as for goods or services"? If you don't pay in the first place, how can you get money back?

Has it occurred to the financial geniuses that the government might be taking too much from us taxpayers in the first place, thereby causing the recession that they think can be prevented by giving us some of our own money back?

So how does that work again?

Let's see: I buy a new floor, the floor company grows and creates new jobs ... or does it just not lay off an employee because business is slow?

Which takes us to a Senate version of the "economic stimulus bill," which increases unemployment benefits and food stamps - just in case the floor-buying thing doesn't work like it's supposed to.

But wait, the Senate also wants to give the "rebate" to people on Social Security, which I am about to start collecting. So will I get a double dip in the rebate pool? Maybe I can refinish my battered wooden bedroom floor too! Wow, am I growing the economy or what!

But speaking of Social Security, isn't it going to run out of money before our kids - the same ones we expect to deal with the accelerating national debt - can collect? I'd better save my rebate for my grandchildren, to help them buy food.

What is this "grow the economy" thing anyhow? Where are we growing to? What should people who are not tripping over their kitchen floor spend their rebate on - something they don't need?

Some economists say we should save more, but others say that would be a bad use of the "rebate" because it's meant for economic stimulus.

Well, savings are used for loans, some of which can go to home mortgages or start-up businesses, right? But careful, isn't this recession partly due to lenders who gave money to too many potential deadbeats, and then sold the mortgages to China - whose own businesses are competing with ours?

Maybe if I'd taken Economics 101 at Penn State this would all make sense. But maybe not. Using just my dad's principles, I seem to have come to the same conclusion as the National Taxpayers Union, which sent a letter to Congress about the "stimulus plan":

"It is becoming clearer that it would favor wealth redistribution over true economic expansion. ... Even those who had no income tax burden will be eligible for checks worth $300, provided they earned more than $3,000 in 2007. These tax rebates don't create any new wealth, they simply redistribute resources that the Treasury extracted from others.

"In addition, the plan will increase the limits for loans purchased or insured by the Federal Housing Administration as well as Fannie Mae and Freddie Mac. ... This expansion of federally sponsored mortgage debt is but a continuation of risky lending practices, backed implicitly by the American taxpayer. ... many businesses will shift their future investments up to 2008, potentially leading to a slowdown of investments in 2009. Consistent and stable business expansion requires long-term policies, not temporary changes.

"Despite claims by its proponents, this plan will not lead to the kind of economic stimulus that has been advertised. Congress has no mechanism for 'creating' additional wealth in America over the short term, as 1970s experiments in tax rebates and spending increases proved. This plan amounts to taking a bucket of water from the deep end of the pool and pouring it in the shallow end; the result yields neither new water nor a larger pool."

Maybe I'll just get some linoleum samples and nail them over the holes in my floor.

Barbara Anderson is executive director of Citizens for Limited Taxation. Her column appears weekly in the Salem News and Eagle Tribune, and often in the Newburyport Times, Gloucester Times, and Lowell Sun; bi-weekly in the Tinytown Gazette; and occasionally in the Providence (RI) Journal and other newspapers.