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The Planned Tax Rebate

LostAngeles

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So as you might have heard, they're planning to give us a tax rebate soon in the hopes of pumping some money into the economy. I was talking about it with my mom and she'd mentioned that she'd heard commentators lamenting that the money would be used to pay bills instead of people going out shopping with it. She couldn't understand why that would be a real problem since if they pay off the bills, they then have more money to go shopping with. I figure that if that is a concern, then the idea is that they want the money pumped into the cycle quicker than it would be if it was used to pay off bills.

I am not an economist. Neither is my mom.

Who can better explain this without climbing a stack of soapboxes?
 
The difference is in spending on new products to therefore get a spike in product demands or paying for goods already purchased, decreasing debt but not increasing production of anything like computers. I have a lot more to say but it'll have to wait until tomorrow.
 
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skeptigirl said:
The difference is in spending on new products to therefore get a spike in product demands or paying for goods already purchased, decreasing debt but not increasing production of anything like computers. I have a lot more to say but it'll have to wait until tomorrow.
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OK, cool. I'll ask another question that I hope you can answer as well.

Considering that credit and lending (sub-prime mortgage crisis, anyone) is a problem in this country, shouldn't increasing the ability of people to pay that down also help?

Thanks in advance.
 
If it keeps them from losing their house to foreclosure, but the planned rebate won't do that. What happened here is the usual greed rich quick scam, we've seen it before on large and small scales.

People were sold loans and in some cases they were misled as to what the rates would change to (various schemes increased people's interest rates). Then those loans were sold, and those were sold and by the time it got to the last guy, no one was doing the usual credit checks and normal loan procedures. The loan buyers didn't care because they planned to sell the loans again. Like I said, greed rich quick schemes.

Just like pyramid schemes, at some point, the thing collapses. The people who now own the loans have no collateral to back the loans because the housing market slid, the people paying the mortgages can't pay because the deceitful rates kicked in and you have some big investors taking the hits as well people lose their houses to foreclosure. The house sells for less than the loan. The money is in someone's pocket but there are still big financiers who forked out more than they got back.

And the people who lose the house owe more than the house sells for so they lose, and they cannot get credit to buy a replacement house even thought those are cheaper too. So now the real estate falls even more because you decrease the pool of homeowners.
 
LostAngeles said:
So as you might have heard, they're planning to give us a tax rebate soon in the hopes of pumping some money into the economy. I was talking about it with my mom and she'd mentioned that she'd heard commentators lamenting that the money would be used to pay bills instead of people going out shopping with it.
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It should not really matter if a fiscal rebate is spent on past or present consumption, it would still deliver the same boost to GDP. If the tax rebate was saved (because people figured it was only temporary and therefore no justification to increase spending at all) then it would achieve less of what policymakers want.

She couldn't understand why that would be a real problem since if they pay off the bills, they then have more money to go shopping with. I figure that if that is a concern, then the idea is that they want the money pumped into the cycle quicker than it would be if it was used to pay off bills.
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The rationale for a tax cut is that it is one of the quickest ways to implement some "counter-cyclical" boost to the economy. To date there have been 0.75% in interest rate cuts and it is a racing certainty that there will be another 0.5% reduction before the end of the month--but interest rate cuts act more slowly. In fact, by the time the effect of lower interest rate cuts hits people's borrowing, investing and spending behaviour, the slowdown in growth (or recession even) may have started to reverse already. It is more immediate to give people more income in the form of tax cuts. Of course, it increases the deficit, and not every government is so keen (or "Keynes" :)) to do this.

LostAngeles said:
Considering that credit and lending (sub-prime mortgage crisis, anyone) is a problem in this country, shouldn't increasing the ability of people to pay that down also help?
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Yes--your government has already taken a stab at that. The latest proposals are to counter the effect of a more widespread slowdown in economic activity on "main street".
 
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acuity said:
Make that "another 0.75% reduction today" . . .
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That should restore confidence. After all there is nothing like making the biggest cut in rates for 26 years, outside of the normal timescale for interest rate adjustments, to comfort people that you have your finger firmly on the pulse.
 
Jaggy Bunnet said:
That should restore confidence. After all there is nothing like making the biggest cut in rates for 26 years, outside of the normal timescale for interest rate adjustments, to comfort people that you have your finger firmly on the pulse.
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Indeed :)

And those doomsayers who claim the Fed has an asymmetric response, and that there's a "Bernanke put", are ignoring all those occasions when the Fed hiked rates inter-meeting by 75 basis points because markets were rising too fast.
 
The velocity of money (turnover time) has drastically slowed in the economy over the last six months which effectively reduces the money supply. "Helicopter" Bernanke is just compensating by dropping money out of helicopters.
 
The commentators probably aren't economists either, at least probably not very good ones.
 
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When I get a windfall, I always apply it to principle, on the grounds that paying off debt that way saves me money on interest. OTH, if the government has billions of dollars to spend mucking with the economy, maybe applying it to the national debt might be wise.
 
acuity said:
It should not really matter if a fiscal rebate is spent on past or present consumption, it would still deliver the same boost to GDP. ......
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Missed the chapter on deficit spending, did you?

How is paying for something already produced supposed to increase production?
 
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I've not read the details, but apparently Congress made some adjustments to the AMT calcs. The changes resulted in me falling out of the group being hit by this, so my final tax bill for 2007 just went down by $2700.
 
It's unlikely I'll ever argue against a tax cut or one time rebate. Less money for them and more for us. That's a win-win. [however, I'm well aware that lack of money doesn't stop them or us from spending like drunken sailors on shore leave].

How will this reduce the cost of oil, which is the predictor of health for the global economy. The tax rebate is a silly short term election year stunt that might delay things by a few months, maybe out past November 4th.....
 
skeptigirl said:
How is paying for something already produced supposed to increase production?
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You mean as opposed to not paying for something already produced?

If you default on payment, future production is impared by the expense of recovery from your default. If you pay, future production is not impaired.

If you were never going to default, but you get a tax rebate windfall, then if you use the windfall to pay the debt, the financial means that you were intending to use to pay it with, are free to spend on something else.

If all your debts were suddenly cleared tomorrow, would you engage in any additional spending and borrowing, over and above what you would have done otherwise? If so, you will increase demand which will increase production.
 
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Mister Agenda said:
When I get a windfall, I always apply it to principle, on the grounds that paying off debt that way saves me money on interest.
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But there is no reason why people should always do this. Your saving on interest is in competition with the opportunity value of using the money for something else.

OTH, if the government has billions of dollars to spend mucking with the economy, maybe applying it to the national debt might be wise.
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You think the US government should be raising taxes and/or cutting spending at this point? Or printing money to redeem T-bonds with?
 
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skeptigirl said:
Missed the chapter on deficit spending, did you?

How is paying for something already produced supposed to increase production?
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As acuity points out, the cost of default is something to consider here (even on unsecured debt), as is the actual ability of the consumers to continue to acrue debt in the future, thus increasing production. Using the money to pay down debt might not have the same immediate impact on production as using the money to spend, but it would most likely help increase production (or prevent production from dropping) shortly in the future when those same consumers turn around and use their renewed credit to buy things.

On the scale of consumer debt, something like a tax rebate (I see $800 - $1600 tossed around) can have a real impact on near future consumption if it is applied to paying down debt to free up credit.

It's the savers that could muck things up a bit by keeping the money out of the wider economy, at least for a time. It's still possible that saved rebates could increase GDP (or slow GDP decline) by providing a source of investment funds that can be loaned out by banks or other financial institutions, but it doesn't have the same kind of immediate impact as people simply spending their money. Providing extra source of loanable funds is the mechanism the Fed uses to pump money into the economy, so it does work to stimulate growth, but there is a lag of several months before the effect is seen.

Any extra money will likely end up stimulating the economy eventually, unless you put it in a hole in your backyard and let it rot, but the time involved seems to be the government's primary concern.

ETA: Oh, I see the article claims a 1% increase in GDP from the 2001 rebate. Not a huge increase, but certainly not insignificant either.
 
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JonnyFive said:
It's the savers that could muck things up a bit by keeping the money out of the wider economy, at least for a time.
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That's why, instead of cash, the tax rebate should be in the form of coupons and gift cards and such. :D
 
balrog666 said:
The velocity of money (turnover time) has drastically slowed in the economy over the last six months which effectively reduces the money supply. "Helicopter" Bernanke is just compensating by dropping money out of helicopters.
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"As God is my witness, I thought turkeys could fly."
 
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