Handling Finances

The debate over details is over and we’re getting economic stimulus checks to try to help boost consumer spending and stave off the dreaded recession. Of course, the tax rebates won’t be coming until July because the IRS just isn’t set up to deal with a set of tax rebates and 2007 tax submissions any faster, but it certainly has the potential to at least limit the length and severity of a recession even if the recession is not avoided entirely.

On my way home from work today, I heard a great interview with one of Clinton’s economic advisers, Jason Furman on NPR. It discussed the 2001 tax rebates where 36 billion dollars were sent out to 2/3 of American households and what we might be able to expect from the upcoming tax rebates. Jason said that in 2001, 2/3 of the money was spent, though the top item people bought was clothing — a detail that is a bit discouraging as most of our clothing was made outside of the US so a good chunk of that money didn’t stimulate the US economy. However, the next two highest categories were health-care items like glasses and then food — items that are generally made in America.

In the past few days, I also heard (probably on NPR) that some economists weren’t convinced that people would spend as much of the money this time around. It certainly helps that the package includes 28 billion that will be targeted to the poorest working Americans who wouldn’t have been helped by a tax rebate since they pay little or no taxes. They are by far most likely to spend the money compared to those with higher income who might be more likely to save the money or use it to pay off debt after feeling pressure of falling home values and rising mortgage rates.

What will I do with my check? I will be putting it all toward the down payment on my new house sometime next winter. Note that I’m not putting it toward a house to help the economy — my primary advice to anybody considering spending the money is to save every penny. While it might make a small difference toward holding up our consumer-driven economy, what we need most is an economy where debt no longer rules the average American’s finances and no matter the temporary effects of a recession, saving this stimulus money will put our nation one step closer to fiscal responsibility. In fact, although I (almost guiltily) am going to use this money toward purchasing my first home, that simply means that I will be able to increase my retirement contributions about a month sooner as I’ve been capping my retirement saving at 10-12% of my family’s income until we’ve purchased the house.

It’ll be interesting to see how consumers react to this stimulus package. Those who can look ahead past the looming recession might see that less debt payments and more savings will ultimately result in more passive income from investments. Long-term, that would result in a much greater net increase in consumer spending than the 100 billion we’re getting in July. I’m in favor of the stimulus package — it’ll certainly keep the stock markets from falling as fast and potentially from falling as far in the next year or so. At the same time, I’m also a great believer in the need for a cyclical economy where great booms must be followed by slower growth to weed out inefficiency that tends to build when money is flowing fast and furious. In the end, since this money is coming as a tax rebate from a government that is already deeply in debt, all it means is that I’ll be paying it back in a decade or so when taxes are raised to recoup the losses or as programs like social security are slashed in the face of rising costs and stagnant tax revenue.

Does saving my stimulus check mean I’m unpatriotic? Not one bit. I might not be stimulating the economy now, but in raising two or more children, I’ll be spending like crazy for the next few decades. The better prepared I become now (like with saving my money instead of blowing it on cheap clothes or glasses I don’t need) the more I’ll have to spend later, stimulating the economy like the good patriot I am.

This entry was posted on Thursday, January 24th, 2008 at 8:05 pm and is filed under Economy, Saving. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.