Tax Credits?

Several days ago, President-elect Barack Obama announced that he was including in his economic stimulus package tax credits.  An individual could get as much as $500 and a couple up to $1,000.  While I am no fan of paying taxes and believe that often our tax money is wasted (nope, I happen to think the DNA study on Northern Rocky Mountain Grizzlies was a good thing, but don't get me started on the things I think are a waste, like all the opulent offices for Members of Congress...)I am a little concerned about these tax credits.

As he was announcing the tax credits, President-elect Obama was also voicing his concern over the record deficits in our national budgets.  And of course, given the apparent need for Keynesian economics the national deficit will increase to levels unimaginable even a decade ago.  A brief econ 101 here: when the federal government has a budget with a deficit, they have to raise money to pay for things that are over and above the income (taxes) they bring in.  So, the government can either print money and cause inflation (think Zimbabwe with astounding inflation) or they can sell treasury bills, which is essentially borrowing money.  And the problem with borrowing money is that the federal government is, simplistically put, competing with us for a finite amount of lender's dollars.  If you're a lender, who would you rather lend to, the US government or a private business?  Deficit spending essentially inhibits private sector economic growth.  There is also that dicey moral issue of having our children, grandchildren, and great-grandchildren pay for our current services, since that is when the debt is paid off, many many years in the future.  Much less the issues surrounding who the government borrows money from: China, governments in the Middle East...

Ok, so giving tax credits will further increase the deficit.  

Many of my progressive friends object to the tax credit because it appears to be appeasing the Republicans, who they blame for this whole economic melt-down.  The reality is, in Washington, DC, policy is not made with out compromise.  And trust me, there are a lot of Democrats who also want a tax credit.

Obama justifies the tax credit as "putting money back into the pockets" of those who need it the most.  I disagree.  

Let me ask you, does the elderly woman who tries to get her prescriptions filled and is told the cost is over $600, she lives on Social Security and has to make a decision to eat or buy drugs, much less pay rent, transportation costs, utilities...you get the drift, does she even pay taxes?  Nope.  But could she use $500 cash to help pay some monthly bills?  Or more importantly, a whole revision of the so-called prescription drug benefit so our senior citizens are not put into embarrassing situations at the drug store.  Really, I believe the people who could use the tax credit the most are the people who don't pay taxes.  Poor people spend money (and hence stimulate the economy) because they have to.  Moderately well off people can take the tax credit and save it, thus not stimulating the economy, which is what we saw in the refund checks the summer of 2008.

As exhibited by the amount of time I spend on this issue, President-elect Obama has a huge nightmare on his hands.  Today I heard that for every available job in this country, 3.1 people are seeking it.  And that if, by the height of this economic melt-down, unemployment increases by 50%, it would make approximately 10 people seeking every job.  Those are scary numbers.  Clearly a whole range of policies must be implemented to prevent a national disaster, or at least mitigate the one we are in.

Without running the numbers, my guess is that legislating this proposed tax credit will not eventually cost the federal budget very much money, but it makes Obama sound reasonable, concerned about the middle class, and bi-partisan.  It is in a sense giving him money in the bank to perhaps ask Congress for subsequent measures which may be controversial, such as overhauling the health care insurance system.  

But the reality is it will not alone or even with his other proposals, be a significant stimulus to the economy.  It's just an example of how the games of politics are played.