Do You Spend or Save?

Posted on January 9, 2009 by Markus Stocker, Recommended 0 | Recommend

From the Office of the President-Elect, the Dramatic action article,

To get people spending again, 95% of working families will receive a $1,000 tax cut. (change.gov)

I certainly lack understanding of the big picture as well as the little details. However, I’m uneasy with this idea.

On one side, I wonder whether $1,000 tax cut makes a significant difference for the majority of the 95% of working families. Could it be that some of them would need much more than $1,000 and the rest would be happy to forgo the tax cut, ideally, knowing the money is invested in something meaningful?

On the other side, I’m skeptical about the motivation, i.e. to get people spending again. As far as I understand, the current economic crisis is rooted, at least partially, in the problematic and questionable mentality of spending more than one can afford, i.e. living on credit. Provided the tax cut is meant to be a relieve for struggling families, isn’t this motivation nurturing exactly the problematic mentality of spending everything one has, and more, as soon as there is money around? I agree, those who need more than $1,000 will probably spend all of the tax cut. However, I wonder if many might prefer to save the money, in which case, I guess, the tax cut is, somehow, a favor to banks. Interesting.

I understand, when masses stop spending, something big comes to a halt and this has a huge impact on the entire economy. However, I can’t blame anyone who learned from this experience and has decided, perhaps as a 2009 resolution, to save more and, hence, might not spend the $1,000 tax cut.

According to Mark M. Zandi, chief economist at Moody’s Economy.com, in No Instruction Manual as Stimulus Bill Takes Shape,

Each dollar of additional money for food stamps yields $1.73 in additional economic activity, Mr. Zandi estimated, and each extra dollar in unemployment benefits yields about $1.63. By contrast, Mr. Zandi estimated, most tax cuts produce less than a dollar for each dollar of stimulus, especially if the tax cuts are temporary, because people save at least some of their extra money. (NYT)

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