Another $500 a person handout?

I thought we tried this last year, and it didn’t work.

The incoming administration is considering tax cuts of $1,000 for couples and $500 for individuals that will be delivered by reducing the tax withheld from paychecks. That plan has been estimated to cost about $140 billion over 2009-2010.

The lump-sum rebates issued earlier this year were used by many people to pay down debt, rather than spending the money and boosting the economy as the administration had hoped.

“People need money in their pockets to spend,” Axelrod said. “That’ll get our economy going again.”

The first handout didn’t do much because it was too much money in one fell swoop, leading people to use it to pay off debts, rather than buying goods and services, which is what we want them to do in order to help the economy (reportedly, only a third of the earlier $300/person handout was actually spent). This time, the money will be spread out throughout the year in the form of a reduction in your withholding taxes (actually this would be a permanent tax cut). So I did the math. Say you get a paycheck every two weeks, so over a twelve month period that makes 26 paychecks. If you spread the $500 per person tax cut over 26 paychecks, that puts $19 more in your pocket per paycheck.

I’m not an economist, but I’ve studied economics, and have worked at the World Bank with the big brainy (and arrogant) economists, and something here doesn’t quite add up. People didn’t spend $300 on goods and services, but they’re going to find $19 a sufficient incentive to increase their spending on goods and services beyond what it already is? What’s more likely to happen is that someone who earns $750 a paycheck now, who will then earn $769 under the new handout, isn’t going to notice the difference, and thus won’t adjust their spending habits. And if they do notice the increase, why assume that this time they’re going to spend that $19 windfall on goods and services, rather than sock it away in the bank, or, as they did last time we handed out free money, simply use it to pay off their mounting debt?

The approach taken for this new handout seems counter-intuitive. If you want people to spend the money, i.e., spend more than they would normally (rather than just use this money to buy what they already would have, and sock away the rest), I’d think you’d need to give them a sizable lump sum in order to make them feel “rich” enough to splurge on something extra, even though the tough times would warrant prudence. The worst thing you could do, if your goal is to increase consumer demand and consumption, is to give the consumer the extra money in such a way as to effectively hide it. But that seems to be exactly what this plan would do.

This plan is costing $140 billion dollars. That’s money we could be spending on roads, health care, and lots of other things that do actually benefit our citizens and the economy. It’s money we could be using to make the real stimulus plan even larger, as many economists are asking. But giving people $19 each and thinking that they’re going to see this as a windfall that will magically increase their spending in any appreciable way? I don’t get it.

And finally, there’s the argument that Obama should move ahead with the handout because it was a campaign promise. That’s nice, but we’re trying to avoid the meltdown of the entire US economy here. No tax cut should be considered that doesn’t demonstrably impact consumer demand and thus spending. But since we are moving right along with those campaign promises – promises that for some inexplicable reason simply must be implemented Obama’s first month in office – I assume then that we’ll be lifting the ban on gays in the military some time in February?


Follow me on Twitter: @aravosis | @americablog | @americabloggay | Facebook | Google+. John Aravosis is the editor of AMERICAblog, which he founded in 2004. He has a joint law degree (JD) and masters in Foreign Service from Georgetown (1989); and worked in the US Senate, World Bank, Children's Defense Fund, and as a stringer for the Economist. Frequent TV pundit: O'Reilly Factor, Hardball, World News Tonight, Nightline & Reliable Sources. Bio, .

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