What price stimulus?

At press time, the Bush Administration had proposed several stimulus programs. Among them were a dividend tax elimination, reduced income tax rates, some incentives for immediate investment, and funds to pay for retraining the unemployed. The loyal opposition stated they would rather see a stimulus in the form of $300 to $600 to be sent to nearly every taxpayer, as well as funds to be transferred

At press time, the Bush Administration had proposed several stimulus programs. Among them were a dividend tax elimination, reduced income tax rates, some incentives for immediate investment, and funds to pay for retraining the unemployed.

The loyal opposition stated they would rather see a stimulus in the form of $300 to $600 to be sent to nearly every taxpayer, as well as funds to be transferred to states for helping them out of their current fiscal problems.

All these proposals will stimulate the economy — sooner or later — in one way or another. The real issue is the duration of the stimulus and the diversion of dollars. For the diversion issue, the Bush Administration would seek to put more dollars in the hands of the private sector. But Democrats in Congress think this would be inappropriate because there are more public needs for those funds.

If we look at each proposal, we can see that the Democratic plan will have an immediate impact — once it is passed, funded, and issued — about eight to nine months from now. It would put cash in the hands of individuals, who would immediately spend it. Because of the rise in demand, production would increase, jobs would be created, and economic growth would be kick-started.

While that stimulus package would increase demand for goods, we need to be careful about our expectations for its impact on production. Unless the stimulus is spread out over time, it could lead to price increases rather than an increase in the consumption of goods. If all we do, even partially, is raise prices for consumer goods, we will add little to overall economic demand.

Second, this form of stimulus feels good for the moment, but there is no additional $600 check in the mail in two months or four months. Reliance on the demand being stimulated to affect those industries that can increase employment on a sustainable basis is suspect, in my opinion. Yet, it is the most effective way to get the biggest bang in the shortest term. But again, only after the funds have been received.

The income tax reduction proposed by Bush will lead to an immediate increase in the demand for goods, but at a slower pace. It may not happen fast enough to kick-start the economy. Yet this approach does launch a sustainable stream of income to the consumer — businesses and individuals — that will lead to increased consumption.

Elimination of the marriage tax penalty would lead to much the same outcome. However, it does come at a cost; there would be the expectation of a reduction in government spending or an increase in deficits that would increase debt.

Elimination of the dividend tax would lead to higher stock prices and higher disposable incomes for those taking the dividends in cash. Those who reinvest their dividends would see greater growth in their portfolios. The increase in the per-share price of stocks would lead to better balance sheets for companies, which would lead to a lower borrowing cost, thus stimulating investment. However, the time frame for this scenario is longer than a kick-start mentality is after.

Immediate incentives for investment in plant and equipment will kick-start the economy, however, since they will push some of those who are sitting on the spending fence to act sooner. But putting money into training is dangerous since it tends to create schools for the sake of creating schools.

Here's what I see as the key distinction between these stimulus plans. One group feels that the economy, although struggling, will start to grow soon. The other says a major stimulus is needed immediately. Pick your poison.

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