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US Government Passes Stimulus Package including Tax Rebates

published on February 22, 2008

During 2007, it was the real estate market that seemed to be determining the fate of the economy.  A number of events gripped the economy during the year.  There were the write-downs that much of the financial industry was forced to endure due to subprime loans that ended up being securitized into a liquid form of debt that almost instantly became as illiquid as, well, a house.  Then there was the plummeting housing prices that ended up making up the worst year for the national market since the Great Depression. 

With the exception of oil prices, the US economy’s story in 2007 was largely the story of the real estate market.  In 2008, however, the reverse has become true:  Analysts are looking with watchful eyes at the macroeconomy itself in order to determine what will happen to the real estate market. 

The real estate market, in effect, started a wave that’s traveled the oceans of the world round, and now, with that wave on the other horizon line coming at us, everyone is wondering what damage is going to be done. 

Fortunately, Congress’ passage of a sizable stimulus package several weeks ago has allayed the stock markets’ fear of a recession, for now.  The stock market, however, is known for wishful recession.  At any rate, though, all eyes seem to be turned to the stimulus package. 

Size isn’t the only thing that matters in stimulus packages, but it is one of the most important factors.  In total, the bill the President signed into law was about $168 billion, which makes it one of the largest stimulus packages passed in decades.  That’s just shy of 1% of the GDP.  So, it’s a pretty big deal. 

Despite the view expressed by the Treasury Secretary this week, that the housing market is still the biggest risk to the national economy, there was little in the bill that targeted the industry.  A few more mortgages will be available through several federal governmental departments, but no solutions to the scale of the problem. 

About a third of the money is in the form changes in the tax code that are supposedly meant to spur business investment.  It’s doubtful there will be much stimulative effect from this part of the bill – it can best be seen as the standard who’s-got-the-best-lobbyist part of a stimulus package. 

The meat and potatoes of the bill, however, is a tax rebate for up to $1200 per working family, with an additional $300 per child.  In addition, there is a little extra money for those receiving veterans benefits and Social Security. 

There is a cut off of about $150,000 annual per-person salary.  So, in that sense, the money is efficiently allocated.  However, past stimulus packages like the one passed earlier this decade show that much of the money will just go to paying down debt, which will have close to no stimulative quality whatsoever. 

Nonetheless, the bill is a significant one.  While it wastes a whole lot of money, it will still do some good.  It will probably delay a recession for approximately a fiscal quarter.  It’s doubtful, however, that it will keep the country out of a recession, or lift us out of the one we are already in. 

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