Tax Rebates as Economic Stimulus?

From the Globe & Mail:

President George W. Bush pitched his $168-billion tax-rebate plan last February as a way to stimulate the U.S. economy and avert a recession. It didn’t work, as the chart below shows, because Americans didn’t spend the money. They used it to pay down their debts or they put it in their pockets. (The spike in the top line corresponds to the tax rebate.)

If Finance Minister Jim Flaherty is tempted to cut taxes as a means of stimulating this country’s economy, the U.S. experience provides strong evidence that it’s unlikely to work. This year, for the first time since 1952, U.S. households have cut their debt levels. They have also – for the first time on record – paid off more mortgage debt than they added. The consumer of today’s economic meltdown is simply not the consumer of last year’s credit binge.

People are hunkering down. Security, not consumption, is the order of the day. A hurricane may be coming, though where it will hit and how hard is unknown. Who would purchase a car or house that might be in the hurricane’s path? Fear of the unknown – of jobs that might be lost, of housing values that might keep dropping – is in the air.

The margin for error that families allot themselves is shrinking. In good times a lost job may be replaced; stock-market investments may be cashed in; home equity may be tapped. Without that margin, consumers are cautious, whereas the economy requires a certain recklessness on their part, especially in the U.S., where consumer spending accounts for 70 per cent of GDP. (In Canada, it’s just 55 per cent, making a tax cut even less promising as a form of stimulus.)

Mr. Flaherty speaks as if Canada were somehow shielded from a severe recession because its budget is in balance and its banking system is intact. Yet Canada is an export-dependent country, and with the U.S. facing a sharp decline, trouble will hit hard. Hurricanes do not respect borders.

Read the whole thing here

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