Will Stimulus Package Work?

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Table of Contents

What the US stimulus package is all about
Conclusion
References

The US economy is still reeling from the effects of one of the worst financial crises to ever occur in recent times. Triggered by a mortgage crisis which initially became apparent in 2007, America witnessed the rapid collapse of major investment banks and a subsequent tightening of credit which plunged the economy into recession; leading to massive layoffs and a rapid increase in unemployment levels (CBCNews*). Wall Street, in particular, was the hardest hit by the tough financial times, and so many people lost their jobs (Dickler*). In February of 2009, it was reported that the US unemployment rate had soared to the highest level in the last 26 years, and it was estimated that around 12.5 million Americans were jobless.

This figure is still expected to rise, reaching an unemployment rate of 10% by the end of year 2009 (Evans, A1). Certainly, the tough economic times that America is facing are not about to end any time soon. In response to this crisis, the federal government gave the go ahead for the use of an economic stimulus package that is expected to aid the economy in recovery. On the 17th of February 2009, U.S President Barrack Obama signed the American Recovery and Reinvestment Act of 2009. This package offers tax cuts and is expected to trigger spending. However, this package has faced opposition from a cross-section of the public. The idea of borrowing money and spending out of the economic crisis does not seem to be a very sound economic decision due to the risk of falling further in debt and also places the producer at risk. Though based on some economic concepts, it is possible that the stimulus package may not work.

What the US stimulus package is all about

The US stimulus package is under the American Recovery and Reinvestment Act of 2009 which was signed into law on the 17th of February 2009. The total cost of the stimulus package is US$ 787 billion. The money will be spent in three major categories: Tax relief, appropriations and direct spending. Tax relief is targeted at individuals as well as businesses through the larger portion is targeted at the individuals. It is expected to consume a total of $212 billion which is 27% of the total stimulus package (Sahadi **). The tax breaks available to the individual have been broken down as follows:

Making work pay credit: this grants credit equivalent to 6.2% of pay up to $400 for each person. If couples file jointly, then it is 6.2% of pay up to $800. The full credit is payable to those earning up to $ 75,000 ($150,000 if it is a couple). A partial credit is also payable to those earning up to $ 100, 000 ($ 200,000 for each couple). For most of the working people, the credit will be paid over a period of time, at approximately $15 for each period supposing there are 26 pay periods in one year. This credit will be refundable, therefore low income families which don’t qualify for the payment of income tax can still access it. The estimated cost of this credit is $116 billion (Sahadi *).

Payment for those not working: for those who for some reason or other are not working, such as retirees or the disabled, the bill caters for them in the form of a $250 payment that will be paid at a go. The estimated total cost for this one time payment is $14.2 billion (Sahadi *).

Higher-income families: the middle and upper-middle-income families are protected by the bill from paying the Alternative Minimum Tax for one year. The estimated cost for this break is $70 billion (Sahadi *).

Temporary deduction for car buyers: those who purchase new cars, motorcycles as well as light and recreational vehicles in 2009 will have temporary deductions on state taxes as well as local state taxes. This deduction is applicable to those who are earning the $125,000 or less, while for joint filers, the maximum pay is $250,000. This deduction is applicable even for those taxpayers who do not itemize, and it may be taken on top of the standard deduction. The total cost is estimated at $1.7 billion (Sahadi *).

Temporary credit for those buying homes: through this bill, the first-time homebuyer credit, which is temporary and refundable has been increased from $7,500 to $8,000. The law which states that the buyer has to pay back the credit if he or she stays in the house for at least three years has also been removed from the list of requirements while the expiry date for the credit has been extended from the 1st of July to the 1st of December 2009. Those who qualify for this credit must have bought a home between the 1st of January and the 1st of December 2009. Those earning up to $75, 000- $150, 000 for those filing jointly- are eligible for a full credit. The estimated cost for this is $6.6 billion (Sahadi *).

New temporary college credit: the bill also establishes the American Opportunity Tax credit effective 2009 and 2010 which is worth $2,500 from the previous $1,800 Hope Scholarship tax credit. Those earning up to $80,000 or $160,000 for those filing jointly are eligible for full credit, while those who earn between $80,000 and $90,000 are eligible for a partial credit. The break is partially refundable; therefore those who earning too little to pay tax can access some of the credit. The estimated cost for this venture is $13.9 billion (Sahadi *).

Temporary Pell Grant increase: under this bill, the maximum Pell Grant will be increased by $500 to reach $5,350 and in 2010, this figure will reach $5,500. The estimated cost for this bill is $13.9 billion (Sahadi *).

Temporary expansion of child tax credit: the bill lowers the income threshold to $3000 for the child tax credit to be refundable. This applies to 2009 and 2010 and is expected to enable the low income families to access more of the credit. The total cost is estimated at $14.8 billion (Sahadi,*)

Temporary increase in earned income tax credit: Under the bill, the income tax credit will be increased temporarily from 40% to 45% of qualified pay for low income families who have at least three children. This also provides for a marriage penalty respite for those couples who are eligible for at least a proportion of the credit. The estimated cost for this venture is $4.6 billion (Sahadi*).

Other than tax relief, the second category of the stimulus package spending is appropriations spending which is expected to consume $308.3 billion, which amounts to 39% of the total stimulus package budget as per the Congressional Budget Office. Part of this money, $120 billion will go into financing various infrastructure as well as science projects. Not less than $30 billion will be spent on infrastructure projects that are energy related (Sahadi **).

The last category of the spending package is direct spending which will consume the remaining 34 % of the stimulus package budget; a total of $267 billion. Direct spending involves the increment of unemployment benefits as well as food stamps (Sahadi **). Currently unemployed workers have an extended deadline (until December 31) to register for 20 weeks more of unemployment benefits, while those living in what is considered a high unemployment state can apply for an additional 13 weeks. The weekly unemployment benefit has also been temporarily increased to $25 more than the current $300. The initial $2,400 of benefits in 2009 will not be subject to federal income taxes. The food stamp payments would also be increased by 13.6%, while food banks would be helped to replenish their stock. Local groups which provide assistance to needy families would also be assisted through some provisions of the bill. The bill provides financial support to states so that they can form a contingency fund for a welfare program dubbed Temporary Assistance for Needy Families, which will provide direct financial assistance to those who are in need (Sahadi *).

Is the Stimulus Package really feasible?

The US stimulus package is expected to lift the American economy out of a recession that has plagued it for more than one year now. As a statement of purpose, it is aimed at preserving as well as creating more jobs to enhance a speedy recovery of the economy. Along with assisting those who have been hardest hit by the recession, it will also provide investment opportunities to enhance employment and economic efficiency. Investment in transportation and other infrastructure as well as environmental protection is all aimed at providing long term benefits for the US economy (GPO, H.R. 1-2).

Those who are in support of the American Recovery and Reinvestment Act have touted it as a viable solution to America’s recession problem. However, the first impression that one gets from reading the bill is just how big the government is spending. Billions upon billions of dollars are being channeled to all sorts of projects, aimed at providing the much needed stimulus. The end result is that the government is faced with a budget deficit which it has to finance through borrowing from outside. The president himself noted that the US budget deficit could surpass $1,000 billion even without taking into account the new spending measures that he has put in place (Harnden *). This means that the federal government may be forced to borrow from outside to finance its activities.

The Congressional Budget Office has approximated that the government may need to borrow a minimum of $1.5 trillion in the current fiscal year to fund the stimulus spending. This will inevitably push the US into further debt; a development that may prove harmful for the future of the US economy, which might find itself trapped in a mountain of debt that will haunt the future generations. Besides, the tax breaks are putting a lot of money into the pockets of individuals as opposed to businesses (Ebeling *). While this move is aimed at enhancing consumer spending, it might not provide the stimulus that it is expected to since people will inevitably save a significant proportion of the money that they receive for speculative purposes or they will use it to pay off any debt that they may have accumulated with very little increase in economic activity. Having just suffered from a major economic downturn, it is highly unlikely that there are any Americans who are big on spending at the moment. A better option would have been to give incentives to businesses even as individuals receive tax breaks so that the businesses can pass along the benefits to the consumer in the form of reduced prices.

It has been observed that stimulus packages do not really work. Several studies have found that stimulus packages in the past which increased government spending actually caused the gross domestic product to decrease by up to 0.36% (Rugy *). A reduced economy definitely does not augur well with businesses since they will be forced to cut back on production; otherwise they risk to run losses. The government is spending more and more money on investment activities, and in the process, it brings about the crowding out the private sector. For this reason, businesses may have to shift to other areas in which they will have a market.

One of the provisions of the stimulus package for corporates is that those who hire new workers or decide not to lay off their workers will benefit from a one year tax credit. Such a provision is not economically viable since it will induce employers to keep employees even when it is not productive for their businesses. Fewer employees will enable the company to be able to expand in more productive economic ventures that they could initially not access due to limited finances. The worst bit of the economic recovery plan is that it harms the entrepreneur. Since the government is borrowing at a relatively low rate, there isn’t much capital at a higher rate for the entrepreneurs to be able to use human and physical capital more effectively. Thus the measures have been labeled as “anti- entrepreneur” (Tamny *). It is also possible that the increase in welfare might make the people less motivated to look for employment such that by the end of the day, the American economy might have people feeding on the sweat of other people.

Conclusion

The US economy is knee deep in recession with one of the highest unemployment rates to ever be recorded since the 1980s. For this reason, it is in dire need of an economic recovery plan that will give it the much needed boost and enhance growth. The Obama government has rolled out a fiscal stimulus package which is meant to enhance spending and in the process, give the much needed turnaround to the economy. Unfortunately, it is possible that this stimulus package may not really work. The United States is already faced with a huge debt burden and increasing it may not be in the best interests of the future. Besides, consumers are not likely to spend more just because their disposable income has been increased. Thus the stimulus package will not work and the government should urgently consider a new package that is less spending oriented.

References

CBC News. Obama signs $787B US stimulus package into law. Web.

Dickler, Jessica. Lehman layoffs, the tip of the iceberg. CNNMoney.com Special report issue #1. Web.

Ebeling, Richard. Who will fund Obama’s Stimulus Spending? 2009. Web.

Evans, Kelly. Jobless Rate 8% highest in 26 years. The wall street journal Digital Network. 2009. Web.

Government Printing Office (GPO). One hundred eleventh congress of the United States of America: American Recovery and Reinvestment Act. 2009. Web.

Harnden, Toby. Barack Obama unveils $1 trillion economic stimulus package. Telegraph 2008. Web.

Rugy, Veronique. Stimulating Ourselves to Death: they might sound great but do stimulus packages work? 2009. Web.

Sahadi **, Jeanne. Senate passes $787 billion stimulus bill. CNNMoney.com. 2009. Web.

Sahadi*. Jeanne. Stimulus: How it may affect your wallet. 2009. Web.

Tamny, John. Obama’s Economic solutions are contractionary. 2009. Web.

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Will Stimulus Package Work?

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