As we stand on the precipice of a Recession, the President and Congress are considering injecting money into the market in an attempt to stimulate the economy. While the thought may be well intended, the are a few fundamental reasons why it won’t work.
The proposed stimuli would include a tax rebate to individuals and families, tax breaks for businesses and aid for the low income earners. The reasoning being if an additional $145 billion dollars is put into the economy it would translate into dollars spent with businesses, which would mean higher revenues and spur growth. Unfortunately, since gas prices have been consistently over $3.00 per gallon and the cost of other necessities (food, clothing, shelter) have risen, Americans have turned to debt to maintain their lifestyle.
In many cases credit cards are the instrument of choice. People who have experienced job stagnation, slow downs in business or difficulty finding employment after a layoff use their good credit to open credit lines just to get themselves through a rough spot and as you and I know, there are no shortage of companies willing to load you up with credit cards at interest rates up to 33%.
If the circumstances do not improve, consumers turn to additional credit issuers such a title loans, equity lines of credit, and cash out refinances to supplement their ailing pocket book, but what happens if that doesn’t work? Uncle Sam to the rescue?
The first reason the stimulus package as stated would have problems is people would use the money to retire debt. While this would do well for the creditors, it does not put money directly into the economy. It can be argued the creditors may create jobs as a result of the influx of cash, but it is not likely because funds were already earmarked in accounts receivables, so there is no revenue boom that would facilitate the need for expansion.
Second is the collateral damage caused by the current housing correction. And yes, it is a correction; mortgage companies, banks, and speculators took a gamble on high risk borowers (subprime in the PC world) and are now reaping the rewards for their miscalculations…but I digress.
As the housing duldrums continue there has been a deep decline in business for all of the anxillary companies that rely on housing starts. Industries like roofing, brick masonry, landscaping, painting, home furnishings, electronics, appliances and so on, are searching for ways to compensate for the lost revenue with everything from inventory reduction sales, lower pricing and layoffs. In this group any funds offered would be held for a rainier day or will only serve as a bandage to their hemorraging profits.
Finally, the realization of how the country will be revived…JOBS!! Our current financial situation can only be restored from within. Americans need to have a sustainable income in order to increase credit worthiness, lower debt and return to the roles of consumers. Greater employment in key sectors will also increase savings and investments which allow larger companies to finance expansion and pay higher wages to employees. Our nation has an unemployment rate that has been at historic lows, but good enough aint good enough. The inflationary affects of higher gas prices and food costs, makes the hourly workers pay woefully insufficient. Therefore, a one-time shot in the arm may provide steak for a month or two, but it’s back to peanut butter and jelly shortly there after.
A better stimulus would be educational credits for the low wage earners displaced by the current economic situation. Lower taxes for the middle class and tax incentives for businesses who generate jobs. The unfortunate part is there is no fast answer to our situation. I imagine it will take at least two year before we see a significant change, but as long as we are willing, it can be done!