Economic stimulus

[MGKrebs]

Well, it's not what I would have hoped for, but I'm not sure about it. Dividend tax relief? Is that a significant tool for stimulating the economy? Any thoughts?


http://www.washingtonpost.com/wp-dyn/articles/A3465-2003Jan2.html


CRAWFORD, Tex., Jan. 2 -- President Bush plans to announce an economic package Tuesday that will emphasize cuts in the tax on stock dividends while including tax breaks for personal income and capital investments, administration officials said today.

Administration officials have drawn up plans to exclude 50 percent of dividend income from taxation, according to a person involved in the process; a senior Bush aide, however, said the ultimate figure would be different.

Administration officials said that eliminating the taxation on some dividends would help restore investor confidence and encourage investments in profitable companies. Officials said senior citizens, many on fixed incomes, would receive about half of the benefits from such an exclusion.

 

[vraiblonde]

I truly hope that this is some spin crap the WashPost is doing rather than the real stimulus package. Not that I'm some financial genius, but I don't think it takes one to see exactly who this package benefits.

And now that I've written that, I'd like to see the whole package - I don't trust the WashPost to give me news anymore. Their whole front page today was a joke. They should have saved some trees and ink by just writing "Democrats are good; Republicans are evil and want to kill your grandmother, your babies, blacks, poor people and anyone else they can get their hands on."

 

[Heretic]

I was reading the other day, the writer of the column that I was reading believed that the reason for the slow recovery is cooperations reluctance to make investments (hiring and new products) and keeping a "lets wait and see" attitude. The economy is an interesting thing.....6% unemployment is bad but 4% is good, thats a really small window in my opinion. If you think about it the economy is based entirely on peoples perceptions, sort of a self fulfuling profecy.

I think its almost impossible to know what will help an ailing economy, but knowing how to hurt it is much easier. People have to believe the economy is good before it can actually become good, and they have to believe it is bad before it actually becomes bad.

 

[MGKrebs]

I agree with a lot of that, Heretic. Except that I wouldn't say it's based "entirely" on perceptions, just "a lot" on perceptions.

I think as time goes by we get better at managing the economy; learning from past situations. But there always seems to be some new wrinkle. But I have to believe that there is a lot that can be done right, after all, although all economies have their ups and downs, some stay relatively stable compared to others, even when they run into problems. Japan, Mexico, Germany have all had problems recently ( Japan's very serious) but they managed to pull things out without a meltdown.

A lot of Bush's plan seems pretty good. But the story said that the focus was on the dividend cut. Like Vrai, said, I hope it's BS because that seems real iffy to me. Although, I guess if you have a bunch of retired folks suddenly with some more income, it could help. Just don't know how MUCH it will help.

 

[Heretic]

It will be interesting to see what happens. Regardless of how the economy is bump started the one fact remains CEO's need to loosen their purse strings. And for heavens sake please be honest in earning reports.

 

[demsformd]

Well, under Ronald Reagan, the Republicans passed investment incentives yet during his eight-year tenure in the White House, investment in the stock market actually declined so I am unsure of the dividend tax cut's possible benefits. On another note, I am thrilled to see that our president has finally realized that there is more to America than foreign relations.

 

[Ken King]

I'll wait to see what the President actually proposes versus relying upon the small blurbs that this reporter writes. It seems to be the big talk right now and many Congresspersons are already starting to spew their rhetoric. My question to them is, where is your plan?

 

[Heretic]

Hmmm

I was thinking about what the best way to give the economy a boost is.

Choice A) Give individual taxpayers a break, this leads to them spending more money, working its way up to buisnesses, they hire more people and this makes the economy grow. The bad is what if most people stash the money away for a rainy day, nothing will happen.

Choice B) Give buisnesses a break, this would lead directly to them hiring more people (maybe), expanding their buisnesses, and money working down to the individuals. The bad is what if the buisness also stashes the money away for a rainy day, nothing will happen.

So is the best choice a combination of the two? No matter what the government does it can't tell people and buisnesses how to spend their money so all of this may be just a waste of time and government funds. Do we give buisnesses incentives to hire more workers, how can we do this? Do we give individuals incentives to buy things, how do we do this? Anyone think one choice will offer faster results? Are faster results actually a good thing?

The more and more I think of this I dont see a right or wrong way to do this,

 

[MGKrebs]

My amateur opinion- in the current circumstances, "A" makes more sense. Right now there is more supply than demand. need to build some demand. What could businesses do with an incentive? They can't sell enough of what they are making now.

I suppose there are some circumstances where "B" would work, but it seems to me it would be more about keeping an already strong economy going- that is, companies can't keep up with demand.

 

[Oz]

Originally posted by demsformd
I am thrilled to see that our president has finally realized that there is more to America than foreign relations.

After 8 years of failed foreign policy, it probably needed the attention!

 

[Bruzilla]

Why on Earth do so many people believe that giving individuals more money, in the form of tax breaks, will stimulate the economy? That's total nonsense! If you want to stimulate the economy you have to stimulate business to increase in size and capacity for the long term, not offer a minute increase in sales.

Let's say we live in that land of Perfect that Walgreen's uses in it's commercials, and the government gave every citizen $5,000, no, $10,000 to spend to "stimulate the economy." What would happen? Probably 1/4th of the people would drop the money in the bank. Another 1/4th to 1/2 would use it for paying off old bills/getting out of debt, and the rest would blow it on stuff. The money that's saved doesn't stimulate anything... we already have a glut of cash. The ones that use the money to retire old debts aren't stimulating anything because they aren't buying anything new; they are paying off creditors not manufacturers; and lastly they end up costing creditors money in lost interest payments.

Then there's the last group, the spenders. They buy cars, TVs, subscriptions to Playboy (for the articles), etc. What happens to that money? Do companies use that money to make capital investments in their business? No. They will get taxed on those investments. Do they pass it along to their employees? No. Why should they? Their employees were willing to work for $X/per hour before, so they'll work for $X/per hour now. They are going to invest it where they have the lowest tax liability, like tax-free municipal bonds and the like, and these usually offer short-term benefits to localities followed by long-term debt payments.

There is not enough money in the till to pay every citizen enough money to make any real impact on the economy. You have got to target the money, and tax cuts, to where they make the most sense. Cut multiple business taxes, cut payroll taxes, cut taxes on capital improvements, etc. These will allow businesses to grow, which will mean more employees making and spending more money. It's these three results that will grow the economy, not some feel-good minute tax break for the consumer.

 

[MGKrebs]

The only problem, Bru...

is that why in the world would companies expand if they have too much capacity already? Everybody is already "expanded" from the past few years.

Having said that, i agree that you can't provide enough money to solve any large problem through tax cuts. That's why I think it would need to be coupled with an actual jobs program.( And the only one I can think of is to jump start the alternative fuels industry, but there are probably other good ideas too.) But that kind of thing takes a few years to make an impact. The tax cut part just tides us over until that gets going.

 

[MGKrebs]

OK, I've been reading a little about how a dividend tax cut (or elimination) is supposed to help the economy.

Supposedly, this would prop up the value of stocks, giving the shareholders more wealth, at least on paper. But apparently only about half of the corporations pay dividends, and of those that do, more than half of the shares are owned through mutual funds, which get rolled right back into the stock, so there's no tax implication anyway (until you cash out.)

Even if we accept this as a potentially positive stimulus, I am leery of tying the growth of the US economy even more closely to the growth of the stock market. But I'll have to think about it some more. Feels wrong, but I'm not sure why.

 

[Tonio]

I believe in demand-side economics ("trickle up") when it comes to tax cuts. I know from personal experience that poorer people tend to spend windfalls. So I would like to see a payroll tax cut, or an increase in the income tax exemption.

 

[Makavide]

Originally posted by Bruzilla

Let's say we live in that land of Perfect that Walgreen's uses in it's commercials, and the government gave every citizen $5,000, no, $10,000 to spend to "stimulate the economy." What would happen? Probably 1/4th of the people would drop the money in the bank. Another 1/4th to 1/2 would use it for paying off old bills/getting out of debt, and the rest would blow it on stuff. The money that's saved doesn't stimulate anything... we already have a glut of cash. The ones that use the money to retire old debts aren't stimulating anything because they aren't buying anything new; they are paying off creditors not manufacturers; and lastly they end up costing creditors money in lost interest payments.

Then there's the last group, the spenders. They buy cars, TVs, subscriptions to Playboy (for the articles), etc. What happens to that money? Do companies use that money to make capital investments in their business? No. They will get taxed on those investments. Do they pass it along to their employees? No. Why should they? Their employees were willing to work for $X/per hour before, so they'll work for $X/per hour now. They are going to invest it where they have the lowest tax liability, like tax-free municipal bonds and the like, and these usually offer short-term benefits to localities followed by long-term debt payments.

Okay, in the lland of Perfect - 1 million people received $10,000. One quarter of them put it in the bank - The banks now have an extra $2,500,000,000 (2.5 billion dollars). It does them no good to keep it, so they invest it by giving out more loans - but here is so much, they have to lower their interest rates they will charge to get more people to take the loan. So, the lower interest rates will entice more people to take out the loans for what ever, cars, houses TV's etc. In other words the money is back out on the street, cause people can;t pass up such a sweet deal on low interest rates (ask those who have been refinancing their mortgages)

The next quarter of them pay off credit cards - so the credit card companies now have an extra $2,500,000,000 (2.5 billion dollars) to lend out in credit card debt. So they too lower the interest rates they charge on their cards. People start charging them up again, cause like before, we can't pass up such a sweet deal with lowere interest rates.

The half million people who go out and spend the money - well, they just spent $5 billion dollars.

With this 10 billion dollars being spent, people are buying like crazy, trying to keep up with the Jones's business's are having to expand to keep up with the demand. And the government take in more taxes because people are making more money because they are working harder to make the products.

Just remember, any tax break or rebate multiplied by the 300 million people in the US ends up being a large amount to spread around.

 

[MGKrebs]

Nice analysis makavide.

 

[Bruzilla]

"Okay, in the lland of Perfect - 1 million people received $10,000. One quarter of them put it in the bank - The banks now have an extra $2,500,000,000 (2.5 billion dollars). It does them no good to keep it, so they invest it by giving out more loans - but here is so much, they have to lower their interest rates they will charge to get more people to take the loan. So, the lower interest rates will entice more people to take out the loans for what ever, cars, houses TV's etc. In other words the money is back out on the street, cause people can;t pass up such a sweet deal on low interest rates (ask those who have been refinancing their mortgages)"

Not so fast... interest rates are tied to the prime not to the number of people putting money into the banks. Also, 2.5 billion dollars sounds like a lot of money to us poor folks, but in the grand sheme of things it's barely a blip on the financial radar. An infusion of 2.5 billion into the banks, spread around all banks, is not going to result in any increased loans or decreased interest rates.

"The next quarter of them pay off credit cards - so the credit card companies now have an extra $2,500,000,000 (2.5 billion dollars) to lend out in credit card debt. So they too lower the interest rates they charge on their cards. People start charging them up again, cause like before, we can't pass up such a sweet deal with lowere interest rates."

Once again, you're assuming that this is a lot of money. You're also assuming that it will all go to credit cards... it won't. It'll go to reducing mortgage debt, paying off cars and other loans, paying back student loans, etc. Lastly, credit card and other interest rates are already pretty low, and there isn't much room for lowering them further.

"The half million people who go out and spend the money - well, they just spent $5 billion dollars.

With this 10 billion dollars being spent, people are buying like crazy, trying to keep up with the Jones's business's are having to expand to keep up with the demand. And the government take in more taxes because people are making more money because they are working harder to make the products."

10 billion dollars in a 7 Trillion dollar economy??? Do you know what that works out to as a percentage? Once again... it's going to yield a short-term spending period that will provide a slight increase in profits. This increase will then get rolled into outside investments to protect it from taxes... it won't be handed out to the workers or reinvested into the company.

If you want to really stimulate the economy, you have to make it more profitable for companies to expand and grow. That means lots of capital expenditures for new equipment and employees. You have to make the climate for doing business more favorable from both a financial and regulatory standpoint. That's how you compete in a global marketplace.

 

[Makavide]

Land of Perfect

Bru -

I was using your reference to the Land of Perfect, where they maybe have 3 million people in it - which would make 10 billion a lot of dough.

If we use the US as an example, where there is about 100 million working that would get the $10,000 (which would be a trillion dollars) would that help.

As for Interest rates, yes, some are linked with the prime rate. The fed sets the prime, which is what the treasury charges commercial banks for over night loans. But each bank sets their own rate based on the prime as a benchmark. Some list they will charge 3% over prime for one tyoe of loan, 5% over for another, 10% over for credit cards.

But like most business, which banks are in it to make money, if no one takes out a loan when they charge a rate of say 3% over prime, then they need to lower the rate to get people in the door. Then when one bank lowers their rate others follow so they do not lose out on the business.

 

[Heretic]

I've been thinking about what could be done to revive the economy and who's approach would be best. When I think about it considering the economy is such a black magic the democrats approach may work best one time and the republicans approach may work best another, sometimes neither may work or either may work. Picking which one would work I think would be darn impossible and its basically a crap shoot. Im not even sure we should do anything about it (directly).

 

[MGKrebs]

I sort of agree with that, heretic. It's almost like the goal is to not screw it up. There may not be a lot they can do to fix it, but they can probably cause a lot of problems down the road.