Friday, April 25, 2008

Bush’s Rebate Checks Will Not Be Very Stimulating

President Bush made his usually lengthy and highly logical speech this morning that the $160 billion in economic stimulus rebate checks are on their ways to 130 million taxpayers. According to Bush, the rebate of $600 per individual and $1,200 per family will “…help Americans offset the high prices we're seeing at the gas pump and at the grocery store…”

Given that the price of gasoline averages $3.50 per gallon, milk averages $4 per gallon, and grain prices have increased more than 35% since 2007, I find it very difficult to take Bush’s comments at face value. Much like the U.S. dollar, his comments will be substantially discounted.

A typical driver used about 703 gallons of gas in 2005. Assuming the same consumption level today, this average 58.6 gallons per month for a typical driver. At an average of $3.50 per gallon, this comes to $205 per month on gasoline. A typical family of four spends about $400 to $500 per month in groceries. These two expenditures will cost a typical family about $600 to $700 per month.

So, if the typical family spends the stimulus rebate check only on gasoline and groceries, the $1,200 will last about 1.5 to 2 months. Some stimulus. The U.S. consumer is not really in the mood to spend right now, according to Bloomberg report that notes “U.S. consumer confidence fell more than forecast in April to a 26-year low as record fuel prices and rising unemployment threatened to reduce spending.”

Reuters/University of Michigan sentiment index April report notes that only about 30% of the consumers stated that they would spend the rebate in 2008 and then mostly pay down debt.

“Although the tax rebate will boost spending temporarily, the global rise in food and fuel prices, the declines in home values and higher credit standards are likely to persist for some time and lengthen the period of stagnation in consumption. Coupled with weaker job and income growth, these factors are likely to cause a relapse in spending latter in 2008 and into early 2009 and potentially deeper cutbacks in consumption than has been anticipated.”

Again, reality contradicts Bush’s misplaced optimism.

Now for the other side of Bush’s comment: “…and it will also give our economy a boost to help us pull out of this economic slowdown.” OK, $160 billion is a lot of money and maybe it can help to “pump” the economy. However, the U.S. economy is $13.86 trillion, so it is difficult to see how the $160 billion in rebate check, which is about 1.2% of the GDP will be able to help pull the U.S out of the slowdown.

The Fed has already spent $200 billion – $100 billion in Term Auction Facility, $59.5 billion in Term Securities Lending Facility and $30 billion on Bear Stearns takeover by JPMorgan Chase – and these efforts have not helped to pull the U.S. economy out of its slowdown.

The U.S. is now the laughing stock of the world thanks to Mr. Bush’s business acumen. Here is a piece from the International Business Times on what the world business leaders are reading about the U.S.:

“He is the nation's biggest economic cheerleader at a time of deep uncertainty. "The United States is on top of the situation," he declared Monday. It all has some people shaking their heads. Is there a disconnect here? Does the president get how this might feel to the little guy? Is there a different standard for the big financial community and the strapped homeowner facing foreclosure?”

As I have said it before, thank goodness for term limits. Let me close out this article with an excellent summary of the many failing of the Bush Administration put together by House Majority Leader (D) Steny Hoyer.

Ed Kim

P.S. Luckily, the stimulus rebate is not taxable - EK

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