Something like $275 billion of the proposed $900 billion stimulus plan is reserved for tax cuts. But the tax cuts will just add to the $1.2 trillion dollar deficit with little effect on consumer spending. The reason? Consumers generally save most of the money they get from tax cuts. But the latest savings rate statistics suggest that consumers are now saving on steroids. So I say, scrap the tax cuts.

Things have really changed in the last few years when it comes to savings. In 2007, consumers were spending more than they were making -- just as they did in 1929. To be specific, the savings rate was negative at -0.7% in 2007. Those were the days that consumers could get by on their stagnant incomes by borrowing to buy those flat screen TVs and snowmobiles.

Continue reading Since consumers are saving, scrap the tax cut

Since consumers are saving, scrap the tax cut originally appeared on BloggingStocks on Mon, 02 Feb 2009 12:48:00 EST. Please see our terms for use of feeds.

My definition would be that the plan creates three million new jobs and gets GDP to grow again in the next few years - but also jump-starts economic activity so we don't need to keep borrowing and spending to keep the economy going.

By that standard my guess is that the plan has a 50% chance of succeeding. It will get economic activity going in the short-term but I am not sure if it's enough to revive economic activity in the longer-term. In my view, the plan has the following pros and cons:

• Positives. In general the idea of fixing roads and bridges is good and there are about $323 billion in plans prepared by the states that need funding. I think having broadband in schools is also a good investment in the future education of American students, and that spending on health care information technology could boost its efficiency. Finally, alternative energy is crucial if we hope to free ourselves from dependence on oil and gas from people who don't like us very much.
• Improvement opportunities. However, the problems of this plan are significant. First, getting involved with significant tax cuts to satisfy the Republicans in Congress will slow down the process of getting the legislation passed and it will ultimately bring the U.S. to annual budget deficits that could top $2 trillion.

Continue reading Economic stimulus plan has 50% chance of working

Economic stimulus plan has 50% chance of working originally appeared on BloggingStocks on Thu, 08 Jan 2009 13:51:00 EST. Please see our terms for use of feeds.

The Obama administration and Democrats in Congress figured that there $750 billion stimulus program would add three million jobs to the economy. That should be enough to pull the US out of a recession. It would also rebuild much of America's infrastructure.

It has stated to dawn on the architects of a recover package that the plan will not do enough for the economy short-term. The destruction of jobs and lack of access to credit are getting worse by the say.

What's the answer? Combine $350 million in business and consumer tax cuts with the plan to increase jobs. So, according to The Wall Street Journal, "The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated."

Tax cuts would probably get money into the economy faster than a jobs creation program, but what will people and companies do with the money? It may not make it into the economy in the form of new spending.

The Bush tax rebate happened before the recession started to bite. Many people were willing to spend the money the government sent them. But, in much less than a year, sentiment has changed tremendously. Business and individuals are showing that any money they bring in goes to pay debt or increase savings. It is not clear how that helps the economy quickly. As a matter of fact, given the overall reluctance to spend, it may not help the economy at all.

Douglas A. McIntyre is an editor at 247wallst.com.

As economic problems pile up, Obama looks at tax cut originally appeared on BloggingStocks on Mon, 05 Jan 2009 04:07:00 EST. Please see our terms for use of feeds.

The New York Times reports that some in Washington are using the latest economic catastrophe to push Congress to make tax breaks permanent. What these folks don't recognize is that the tax cuts are a big reason why the economy is in such bad shape to begin with. With unemployment spiking to 5.5%, the worst since 1986, and oil prices up a record $11 yesterday to $138 a barrel, it won't be long before you're paying $5 a gallon for gasoline.

And since oil is traded in dollars, its 70% decline since January 2001 from 92 cents to the Euro to its current $1.56 -- has been accompanied by a 475% rise in the price of oil. The $1.3 trillion worth of tax cuts -- 36% of which went to the top 1% -- are contributing to record deficits. In 2008, we'll have a $410 billion deficit and the 2009 figure looks to top $500 billion. And thanks to $3 trillion worth of wars, the U.S. is borrowing $9.4 trillion -- almost double where we were in 2000.

Thanks to these deficits, the U.S. is borrowing 66% of its $14.2 trillion GDP -- and any country borrowing more than 60% is seen by international investors as a credit risk. You'll hear people trying to convince you that deficits don't matter. But deficits are at the core of all the economic problems we face. Republicans used to be seen as the party of fiscal conservatism. But what they've actually done would terrify a prudent banker.

Continue reading Why tax cuts ruin the economy

Why tax cuts ruin the economy originally appeared on BloggingStocks on Sat, 07 Jun 2008 08:20:00 EST. Please see our terms for use of feeds.

When Ben Bernanke testifies before the House Budget Committee today, he's expected to announce his support for a short-term economic stimulus package, as long as it's based on measures that are quick and temporary, according to the New York Times this morning. He's told lawmakers he won't comment on proposals to link a stimulus package to the permanent extension of President Bush's tax cuts.

Finally some political sanity. I wish Alan Greenspan had taken that stance as President Bush continued to cut taxes during a war. If Greenspan had we wouldn't have added so much to U.S. debt and this country would be in much better shape fiscally to get us through the current credit storm.

Bernanke's support for the short-term fix is critical to getting many lawmakers to accept a stimulus package even if it means adding to the U.S. deficit. Without it, Congress probably could not pass a veto-proof economic stimulus package. President Bush would likely veto anything that doesn't include a permanent extension of his tax cuts to try to bully the Congress into continuing his economic folly - paying for a war on future debt. Our children certainly will hate us for a long time if we continue to ignore the burden we're putting on them.

Continue reading Bernanke expected to announce support for short-term economic stimulus package

Bernanke expected to announce support for short-term economic stimulus package originally appeared on BloggingStocks on Thu, 17 Jan 2008 07:30:00 EST. Please see our terms for use of feeds.