With more than 100 million Americans starting to receive anywhere from $300 (individuals with a $3000 income) to $1200 (couples who filed taxes jointly) in the form of an economic stimulus check to encourage spending, it is time to review the federal government’s plan¹.

The Economic Stimulus Package

When announcing the economic stimulus plan as a panacea for his economic futility, President George W. Bush paraded that the package will “boost our economy and encourage job creation.”

In addition to tax refunds to American individuals and families, the plan also includes worthy business incentives and assistance to homeowners stuck in a mire of foreclosures. The main issue, then, is the fruitless thinking behind the rebates to individuals and families.

Tax Rebates will Not Stimulate the Economy

While President Bush claims that “the incentives in this package will lead to higher consumer spending…” he overlooks what Americans will do in a recession economy when jobs are scarce and prices are souring.

Faults of the Business Incentives

First, Bush’s plan to kick-start businesses is not completely effective. The stimulus plan focus too much on tax rebates and not enough on tax incentives to support businesses in creating jobs.

In fact, this point has been raised several times in Congressional debates, even by fellow Republicans such as Representative Jeb Hensarling of Texas, chairman of the Republican Study Committee:

“Giving temporary tax rebate checks to families, as important as that is, is not the same as economic growth. If you’re going to have an economic stimulus package, it ought to contain some economic stimulus.”

- Representative Jeb Hensarling (R-Texas)
Chairman, Republican Study Committee

Faults of the Tax Rebates

The main problem in Bush’s solution to the country’s economic woes surrounds faulty reasoning in his tax rebates. While we agree with the president that rebates will encourage Americans to consume more (thereby increasing the profits of businesses and eventually increased jobs), we do not agree with the vehicle used.

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During the summer of 2008, Americans will start receiving the refunds in the form of checks. However, as the U.S. economy is currently in a recession, many if not most Americans will probably save the money rather than spend it. These Americans would rather keep the money for more rainy days ahead. Of course, many Americans will purchase food, gasoline, or pay of bills. But they would have done this anyways, regardless of the economic stimulus plan.

Any finance professional can tell you that the wisest decision is to save and invest your tax refunds. This is not recommended by the government as it has little value to the economy.

The hope supporting the tax refunds was that Americans would use the money to purchase flat-screen TVs and computers. Again, there are problems with this faulty hope. As mentioned, many Americans would rather save their checks rather than spend it. Second, many products are manufactured by foreign companies. For example, using your $300 to purchase a “Made in China” product will do very little benefit for the U.S. economy as the proceeds are sent to the Chinese manufacturer. Only by using the money to purchase items manufactured domestically can they benefit our economy.

A Better Economic Stimulus Plan: Issue “Gift Cards”

Instead of spending $42 million to notify Americans of soon-to-come refunds², who will then file them in their banks, the federal government should have issued universal “gift cards” that would have to be used on purchases. Here’s the plan.

Consider a couple who receives a $1200 gift card that can be used at any business in America. The couple is coerced to make a purchase, such as a refrigerator. By purchasing the refrigerator, the business receives the gift card and then proceeds to exchange it with the federal government for a check.

This plan would force the consumer to use the gift card on purchases and thereby increase profits for businesses.

While good in intention, Bush’s economic stimulus plan misses the spot. The better option would have been to force Americans to make purchases with a universal gift card that is accepted at any business.

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References

1. Taxpayers would get checks under economic stimulus plan, CNN.com [↩]
2. When will my economic stimulus check come: the 42 million dollar question… [↩]