Monday, February 2, 2009
Stimulus Plan: Tax Cuts vs. Spending
As you can see from this chart, the banks aren't the only ones deleveraging. This drop-off in durable goods expenditures likely translates into an increased marginal propensity to save. In the current environment, if you give the consumer a tax-cut, they're more inclined to save a hefty chunk of it (especially after seeing their net worth evaporate). It looks like government spending might be the more powerful tool, as long as the money is allocated efficiently. Nobody knows how the $800+ billion will be spent, but we do know that it WILL be spent, so being short long-dated treasuries is becoming ever more attractive.
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That is an interesting assumption made from the durable good graph. Before seeing this I was under the impression that any tax-cut would not be as effective in the consumers pocket as the money (which has already been spent) will be used to pay off existing credit. All in all, we do not save in America. It is the reason that we are in this mess. People will not learn how to save either with a tax-cut, because the idea of a tax-cut in the government's eyes is to spend...which might give us a shot in the short run...but does nothing in the long. Finally, I think Social Security is a big factor with all of this. The fact is that when people lose there nest eggs (shown from the recent downturn), there is a necessity to save more so you can eat and sleep when you turn 70. But with social security and other programs, Americans do not feel the need to save because the government will keep dishing out the goods. Overall, I like the perspective that the author took on the matter.
ReplyDeleteThat's a great point about the consumer having to pay off their debts. As the consumer continues to deleverage, a portion of their income will certainly go to the creditor before the savings account.
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