Last week, President Bush signed into law a $152 billion stimulus package designed to forestall an economic downturn.
In three months, millions of Americans will find checks worth $600-$1,200 in their mailboxes.
Congress hopes that consumers will spend their rebate money and kick the economy out of a recession (if we are even in a recession). They will probably be disappointed. Instead of dramatically increasing spending, it is more likely that consumers will use their rebate money to pay down debt or increase their savings. This will do little to improve economic growth.
Taxpayers will spend some of their rebates. However, most of the $152 billion Congress is giving away will not be spent on new X-boxes or iPhones. A survey by American Century Investments of 1,500 people found that only 25 percent of consumers intend to go shopping with their checks. Of the respondents, 36 percent said they would use it to pay off debt and 25 percent would save or invest it. Moreover, a survey by the National Retail Federation found that consumers plan on spending just 41 percent of their rebate checks.
Even if handing out free money is an efficient way of stimulating the economy, these checks will almost certainly arrive too late. Instead, Congress should reduce the short-term capital gains rate and let businesses deduct new capital purchases from their taxes. The goal of this bill was not to increase savings or to help debtors out. The economy is slowing down, and Congress wants to give it a jump start.
Americans are not going to alter their lifestyles because of a single check from the government. Most of us have significant amounts of debt, and the national savings rate is below 1 percent. Consumers' spending is not limited by their paychecks. Giving consumers more money will not cause them to spend much more because they are already living beyond their means.
Of course, some of the $152 billion Congress is giving away will get spent. Most of it won't though, and the money that is spent will have little effect on economic growth. The increase in the deficit simply isn't worth it.
Instead of handing cash out for free, the government should encourage businesses to expand. Taxing short-term capital gains (which are currently treated as income) like long-term ones (which are taxed at 15 percent) would encourage investors to make more capital available to companies. That capital would then be used to stimulate the economy, create wealth and generate new jobs.
The stimulus plan passed by Congress allows businesses to deduct half of all 2008 investments. But they should have allowed 100 percent of capital expenses to be deducted. These are investments in warehouses, tractors and infrastructure that will let companies expand their operations. This will boost the economy because it will reward real growth.
Companies will only get the deduction if they buy new equipment. They won't have the option to save it or use it to pay off their debt. That new equipment will give companies the ability to sell more of their product or provide more services. If a business buys a tractor, it will need to hire someone to drive it. If it invests in a warehouse, it will need employees to staff it.
If Congress wants to encourage economic growth, they should cut the capital gains rate and let businesses deduct more of their capital expenses - not give out cash for free.
Xander Zebrose is a sophomore who has not yet declared a major. He can be reached at Alexander.Zebrose@tufts.edu.
