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Rebates likely to do little for the economy
Unfortunately, the rising sense of gloom is driving Washington into its “do something” mode.
Democratic and Republican leaders in Congress recently announced agreement on a “stimulus package,” and the House has already passed its version. Senate floor debate on the plan is expected to begin this week.
The centerpiece of the package? The sadly familiar tactic of doling out checks.
Congress should step back and take a deep breath. For all the interest generated by this debate — and who wouldn’t want to receive a nice check in the mail? — past rebates have had little effect on economic growth.
Congress acts so slowly that stimulus packages are typically approved after recessions are over.
Former Treasury official Bruce Bartlett notes that whether these plans take the form of tax cuts, rebates or increased public-works spending, “enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing.”
One of the few exceptions was the 2001 rebate, which was enacted several months before the recession ended. Surveys, however, found that only 22 percent of recipients said they planned to spend the money, rather than save it or use it to pay bills — an estimate later backed up by government statistics.
As Matthew Shapiro and Joel Slemrod of the University of Michigan noted, “Personal saving jumped in 2001 by precisely the amount suggested by the survey results.”
Rebates will certainly make families feel better in the short run, but they don’t create changes in permanent income.
The House plan would dole out rebates worth $600 to $1,200 to most taxpayers; the latest Senate version calls for checks of $500 to $1,000.
Senate Democrats are also attempting to add additional items: more spending for extended jobless benefits, food stamps, heating aid for the poor and housing relief — a list that at least makes it clear that the purpose of this exercise doesn’t have much to do with economic stimulation.
During recessions, people continue to buy staples such as food and laundry soap, but they put off purchases of big-ticket items such as cars, couches, washing machines and houses — products made by the very industries that suffer most in recessions and are most likely to lay off workers.
More spending for food stamps or heating aid won’t boost consumption of big-ticket items. That’s because rebate checks do nothing to permanently boost incomes, the real force that drives increased consumption.
If Congress wants to help the economy, it should do something to permanently change incentives. A good candidate would be a cut in the corporate income tax rate, to make the U.S. more competitive with the rest of the world.
Companies and workers don’t exist on different planets. Workers’ jobs depend on healthy profits — and ultimately, on the willingness of gutsy individuals to take a risk in the hope of a big payoff in the future.
Reducing the government share of that payoff with a corporate tax cut would make entrepreneurs more willing to undertake risk.
As usual, the most likely beneficiaries of government check-writing will be politicians, who will absolve themselves of blame if a recession occurs.
Instead of showering us with cash, Congress should leave short-term management of the shaky economy to the Federal Reserve.
To read Rhonda Chriss Lokeman’s nationally syndicated column for Creators Syndicate, go to KansasCity.com