Home >> United States & Canada >> Economics & Trade

     Email   Print 

The Bush - Bernanke Show Goes On

Bhuwan Thapaliya - 2/12/2008

Many Americans have lost confidence in their country's "economic security" over the last few years and as the recent CNN poll found that 57% of the public believe that the U.S. is already is recession.

The economic crisis is deepening and may soon get worse. Sensing this, America’s Central Bank, the Fed, is cutting interest rates regularly to nullify the possible recession. But even that is proving to be an uphill task and considering so President Bush announced a fiscal injection package to put money back in the pockets of Americans in his desperate attempt to boost the struggling American economy.

Bush is trying to gain economic momentum in American with his tax rebate policy to which the Congress gave final approval on Thursday to a $168 billion economic stimulus package that include rebates for taxpayers and tax breaks for businesses.

About $152 out of $168 would be injected into the economy this year. “Checks would be distributed beginning in early May, after the crush of the tax filing season,” according to The Treasury Department

What is the policy? “The policy will provide tax rebates of up to $600 for individuals and up to $1,200 for couples filing jointly, with an additional payment for families of $300 a child, and a minimum payment of $300 for individuals who pay less than that in income taxes. Payments will be reduced for individuals with adjusted gross incomes above $75,000 and couples with incomes above $150,000, with the wealthiest taxpayers receiving nothing,” according to the New York Times.

It is worth remembering that President Bush has launched a similar scheme in 2001 too, when the economy was struggling after the collapse of the dot- com boom.

The question however is, will the tax rebate policy of Mr. Bush work? Critics argue that with his tax rebate policy, President Bush has put economic policy back on a Keynesian basis.

Will it work? Will it nullify the recession? No, according to Alan Reynolds, a senior fellow at the prestigious Cato Institute.

In his January 29, 2008, New York Post article, “Bear Traps for the Economy,” he has vocally criticized Bush’s tax rebate policy.

Reynolds argued in New York Post about Bush’s intemporal substitution policy, which means people change the timing of activities to take advantage of changing tax incentives.

“The 2009 trap involves shifting spending forward, from 2009 into 2008. This would encourage consumers and businesses to spend more this year and less in 2009. To the extent such ephemeral gimmicks might work, they do so at the expense of next year,” says Alan Reynolds.

Mr. Reynolds is skeptical of the tax rebate. He furthermore argued in his article by stating that the administration hopes to bribe households and firms to rush out and buy anything with the extra cash these consumers get from the tax rebate. And he senses political logic behind this rebate. When people rush into to buy everything, then the market looks good, and this may make President’s Bush tenure look better but at the price of making his successor's economy look grimmer.

Critics of the tax rebate policy are many and they have raised some important questions.

How will Bush pay for these rebates? And what are the guarantees that this tax rebate won’t affect the 2008 Tax returns. Will rebate solve the nation's disastrous mortgage crisis? Is it the right policy to achieve the best economic outcome?

America is having a grave mortgage crisis. According to the reports, 2 million people could lose their home and some 44.5 million Americans will see major downfall in the value of their homes. How will the tax- rebate solve this problem?

Furthermore, even worse than the mortgage crisis is the ongoing U.S. deficit crisis. The U.S. national debt now is $9 trillion. Are there any chances of tax- rebate in solving this mammoth crisis? The chances are miniature.

Dollar is losing its value day by day against all the major currencies of the world and this has given headache to the Fed. And the investors are pulling out money from America fearing further Fed interest rate cuts.

In the midst of this all, we all compelled to ask, “Where has all the American tax payers’ money gone? “The answer is simple. Iraq , of course. Isn’t this a parody? Americans are fighting hard to solve their financial crisis, while their government is busy financing its uncertain war in Iraq .

Bush is not serious about permanently solving the American economic catastrophe. He is just looking for a short term solution. He is not thinking beyond early 2009. It is worth noting here that the government is spending $720 million a day for the war in Iraq and only a pathetic $150 billion in comparison to fix the economy.

If you sum it up, then that amount equals to six months of funding the war in Iraq . Six months worth of funding the war in Iraq cannot safeguard the derailed American economy at any cost.

“Where is the government’s priority?” critics are asking. It seems that the government is more interest in continuing war in Iraq then bailing out American economy.

Meanwhile, supporters of the tax rebate policy argue by stating that doing something is always good than doing nothing. Yes, the extra refund is a clever way to inject some more into the economy and this will give a little relief to those who are struggling. But is the extra sufficient to bail out the American economy as the recession lurks in?

A tax rebate plan is a noble idea if it's large enough and inclusive enough. It goes directly into the economy to the people who will use it immediately. The Tax rebate would assist the working class who are being kicked to the corner by the increased food and energy prices. But given the fact that the American economy is on the verge of recession, this rebate is only a small radish in the mouth of an elephant – hungry and wild.

“Every time we have a tax rebate, the economy grows, people prosper and life is better,” supporter of the tax rebate policy are saying. And their argument is supported by this fact.

“Yet the experience of that first round of Bush tax rebates seven years ago tells us that there might be a case for tax-cutting as part of a fiscal stimulus. Economists at Princeton University , the University of Pennsylvania and the US Labor Department found that the effect of those rebates, worth $300 for individuals and $600 for families, lifted domestic demand by about 0.7 percentage points in the second half of 2001. Not enormous, but not negligible, either. It seems that the advantage of a rebate over increased spending is that, unlike government expenditure, rebates get money into the economy straight away. Building bridges and roads takes time,” argued Gerard Baker in his article, “Tax rebate could be President Bush's best legacy.”

But those who loathe the idea of the tax – rebate policy have different views regarding so. According to them it is just a monetary trick to give an illusion of hope to the otherwise distressed consumers. Tax – rebate is not a free policy, there are numerous strings attached to it and the very fact that it is done to boost the consumers demand under the intemporal substitution policy clearly shows that it is nothing but a policy of shifting spending forward.

Thus, it is no more clandestine that tax rebate is only a temporary solution. It cannot divert recession, it just can delay recession. Throwing money will not solve the economic crisis; it will make it more complicated. This policy is complicated and a mere hypothetical one because there is no guarantee that the people who get their money back will spend it all in the market as the government thinks.

On being asked what you will do with your rebate, majority of the respondents, said that they would pay bills and other loans, and save the remaining money incase the recession creeps in. Very few said that they would shop. Now, under what basis, the government is hoping to revive the economy by filling the consumer’s pocket who are not willing to spend but rather pay off their debt and then save.

American consumers are in debt and there is strong likelihood that they may use the tax rebate to pay off their debts and loans.

What does this signal? It’s just an indirect bank bail outs. This means that the tax rebates will fill the bank drawers and credit lenders reserves. Then the bank and lenders will lend it out again. Thus the vicious cycle will continue over and over again.

What’s the long term solution? It is simple. Phase out the Iraq war. Then the only other realistic way to stimulate spending and revive the economy from its slumber is to cut taxes, extend unemployment benefits, tax credits for alternative energy and energy subsidies for low- income families. But that’s a tough ask for the debt ridden government whose national debt now stands at a staggering $9 trillion. Less tax means more time to pay these debts.

This is dilemma for sure but it won’t be if America ends its Iraq war. If it ends the war then it can easily afford to cut its tax rate. And it must cut the tax, the sooner the better.

That’s still a long way to go, I guess. Hence, in the interim, considering so, what about backing up a sub prime loans with a federal guarantee? It would lower the interest rates automatically and would allow the people to spend their own hard earned money.
Finally, Iraq war must end at any cost. Then only American can pay its national debt and save its economy from sinking or else no matter how hard it tries the truth is – it cannot because now the debt is over $30,000 for every single American in the country.

In other words, the US national debt is expanding by about 1.4 billion dollars a day or nearly one million dollars a minute. Why? Because the government is fast straining resources needed to meet interest payments on the national debt which is well over $ 9.13 trillion.

The national debt is up from 5.7 trillion dollars when President Bush took office in 2001 and it will top trillion dollars when he leaves in early 2009. Considering this soaring debt, Bush tax- rebate means a further rise in the debt. And no matter how hard the Fed and Bush tries to ignore they cannot escape this economic truth.

However, at this critical juncture of the American economic history, tax- rebate or not, the debate among economists and policymakers shouldn’t be carried on just for an academic interest.
It is crucial for them to design and then conduct the anti- recession policies, polices for consumer led market growth, policies for housing growth, and for macroeconomic stabilization, if America is to save itself from sinking into an abyss of recession.