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Tax Rebate Conspiracy: How the timing of tax rebates will delay a technical recession until 2009

Posted May 7, 2008

by J. Christoph Amberger

Baltimore — (TFN): Ask any red-blooded Republican these days about what he thinks about the Bush Administration and chances are the reply will not be all that different from the one a liberal Democrat would give. No matter if Christian right or centrist, fiscal conservative or libertarian, foreign policy hawk or isolationist, everyone has a bone to pick with the president.

Myself included. It’s not just the complicit rehabilitation of the Clintons through the current White House. To me, the squandering of political capital in the aftermath of Hurricane Katrina is probably the most reprehensible and avoidable failure of this Administration.

It is good to see, however, that there’s still some devious strategic thinking left in this lame duck pond at 1600 Pennsylvania Avenue.

Take the $117 billion in tax rebate checks that are being sent out now as we speak. It’s part of a $168 billion “economic stimulus” package voted for by a bi-partisan Congress last February, intended to alleviate the burden of high gasoline prices and the high-risk mortgage fiasco on American families.

Households making up to $150,000 will be handed $600 per adult and $300 for qualifying dependents. Given the average US household size of 2.59, this works out to $1200-1600 per household on average.

Watch the financial video!

Some amateur critics have stated the obvious in saying that this amounts to an attempt to curry favor with the electorate—a bribe, if you will, to subsidize McCain’s bid for commander-in-chief.

Economists like to focus on the proclaimed intended effect: The short-term boost that occurs when people are given unearned money to spend.

$600 does indeed buy a lot of gasoline, even at $3.50 per gallon — 172 gallons, to be precise, enough to keep you average family jalopy running for four to six weeks free of charge.

But here’s where the pure genius comes in. Just look at the payout period. Checks are being mailed from late April through July 11.

Past rebate programs in 1975, 2001 and 2003 did indeed cause short-term boosts in spending. The current one could be adding as much as 3 percentage points to economic growth during the 10-week payout period.

Most of the spending will fall smack dab into the second quarter, carrying over into the beginning of the third.

Now, first-quarter GDP figures came in at a lousy 0.6% growth. Allow for a bureaucrat not to have added the export revenues for maple syrup shipped to Canada,and we’re dealing with stagnating if not declining growth for the quarter. Every talking head from Justin to Kelly, Buffett to Soros has been declaring that we’re already in a recession. And, of course, that “things will only get worse before they get better.”

However, to qualify for a recession proper, you have to have two consecutive quarters of negative growth. Assuming that at least two thirds of Americans will be spending their rebates before the check clears the bank, growth for the second quarter may actually come in positive.
The important thing about the timing, however, is that it resets the clock on the technical definition of recession. It makes sure that the formal criteria to call a recession will not be met at the end of the second quarter 2008.

And as gasoline and energy prices can be safely expected to rise in the summer months, the third quarter of 2008 may also come in positive — with Christmas spending potentially adding a neutral or small-growth fourth quarter.

Of course, it does not avoid the inevitable. It merely delays it. Well into the first term of the next presidency… and probably until the end of the second quarter 2009.

Which means the onset of the big recession will be indelibly associated with the first half year of a Democratic presidency.

Given the short memory of the American electorate—and its tendency to blame the respective government for whatever goes wrong—chances are that the Bush White House, with the gracious assistance of Congress Democrats, has just placed the first major trip wire in the path of President Obama.

And you thought strategic planning was all but dead.

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Posted by J. Christoph Amberger · Filed Under Politics 

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