Economic Stimulus Package – What you need to consider

5 Mar

 

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Seth: Yesterday my girlfriend did her taxes. Extremely dismayed by her minuscule refund, she asked, “well aren’t we supposed to be getting some economic improvement checks?” That’s probably all most people really know, but there’s a lot more to the economic stimulus package than that.

Because of the impact of the mortgage crisis and housing slump, Congress thought it wise to assure the American people they were doing all they could to stave off recession. So quickly and with compromises from both parties, they put together a package of tax write-offs and deductions for corporate investment and cash payments to workers across the country. Most of us will see the benefit in the form of a rebate check of at least $300. There are stipulations based upon income and dependents and such that will determine exactly how much you get. As far as I can tell, there isn’t a downside to individuals as far as your taxes are concerned. The rebates won’t be taxable so you won’t have to worry about that, and there won’t be any impact on your taxes for this year. Look at it this way, Congress passed a tax cut for 2008, but are giving you the money now. Sounds great, right?

Not so fast. Imagine you buy a $20,000 car for your kid. Let’s assume you can’t pay for it all at once so you take out a loan. Now imagine you die next week. So the kid gets the car and the bill. Maybe not so bad for the kid, but imagine instead of buying 1 car you bought 20. Now your kid has 20 cars and 20 car notes. It’s clear that you knew you wouldn’t be able to afford 20 cars, but now it’s no longer your problem and your kid has to deal with it.

That’s pretty much the federal government. Getting tax refunds and having to pay less taxes it great, but it comes with a cost. An exorbitant cost that the government has made no steps to deal with. IN FACT, they exacerbate the problem by spending more money than they have AND cutting taxes (less revenue). Then they pass the bill to the next guy (our kids). Unlike you and I, the government is able to borrow money on top of money and put off dealing with the consequences. So although we’re going to get a few hundred dollars now, the bill we get later, might make us regret taking it. But at least it’s going to prevent the recession…right?

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Ray: The Economic Stimulus Package of 2008 is nothing more than a $156 Billion bribe from Washington politicians to the American public. Why am I considering this a bribe? Well I’m glad you asked. Did it ever occur to anyone that there was a bipartisan effort because this is an election year and both parties have to position themselves as best as possible to win big in November? What better way to do that than by Democrats and Republicans alike playing the role of Robin Hood and giving the American people a few dollars to make them feel better?

The problem with our hero Robin Hood and the federal government is that the stimulus package does nothing to address the real issues. What I’m hearing from every politician is that this money will be given to the American people so that they can spend it and boost sales everywhere, thus thwarting the oncoming recession. Is it just me, or does this plan not make any sense at all.

First of all, American’s spend too much money in the first place. The average American saves less than 10% of their income and most Americans do not save enough to retire comfortably without government assistance. If this is the case, why are our elected leaders pushing us to spend even more money? We should be saving those pennies instead of buying the newest appliance or even worse, 22 inch rims. Instead of saving and investing, Americans have become comfortable with the idea of spending and financing debt. This backward way of thinking is hurting millions of Americans and yet they continue to dig themselves deeper into poverty. But I digress.

Second, The mere fact that the government has decided to fund a stimulus package is literally an admittance of the fact that Americans are being taxed too much. How so? The Government gets money by taxing its citizens. So if the government decides that it needs to give some of that money back because its citizens are experiencing a high level of financial difficulty, then this obviously means that TAXES ARE TOO HIGH.

But to better understand the circumstances that this country faces economically, allow me to draw a somewhat similar illustration to the one Seth described earlier. Imagine a parent is driving on a long trip with her child. Her child is overweight due to a lack of proper diet and exercise and she knows that something needs to be done to change those habits. But while on this long trip, her child becomes hungry and the only thing in sight is a fast food restaurant that has nothing but high calorie and fatty foods on its menu. The parent is faced with a decision: does she allow her child to grow hungrier until she is able to get healthier food, or does she pull over to the fast food restaurant and buy the junk food so that the child won’t cry in hunger despite contributing to its health issues?

In the case of our federal government, they have decided to pull over and feed the country more junk food in order to silence the cries of hunger (during an election year) even though they have done nothing to correct the habits that have contributed to our current economic condition. The serious ramifications of this conduct are that the US dollar becomes inherently weaker, the means of getting financing for major purchases are disappearing, debt per individual is at an all time high ($8,000 in credit card debt alone per person), and people still go on looking to spend far more than they save.

The truth is, recessions are caused by a number of different reasons and giving a few hundred dollars to each tax payer isn’t going to solve the problem. There are global implications to this matter that once again, link back to extremely low interest rates which devalue the Dollar and make it harder for people to use credit to their advantage. There is also the problem of inflation which is a key ingredient in all of this.

However, I do agree with the government in that the best way to combat a recession is to cut taxes as much as possible. Tax relief will do a number of things including decreasing the cost of consumer products, put more money back into paychecks, encourage growth amongst small businesses, and ultimately decrease the unemployment level. For those that don’t know, most companies pass their tax obligation onto the customer simply by increasing the price of their product. So essentially we as consumers end up getting taxed twice!

Along with tax relief, Americans need to be more disciplined in matters that effect their personal finances. How much does a short or long term recession bother you if you have $100K saved in the bank from sound fiscal practices? How much does the foreclosure crises effect you if you knew how to determine exactly what type of mortgage you could afford?

Being ignorant of personal finance is not acceptable nor is the concept of Robin Hood rebates a noble one. I completely understand that people sometimes fall on hard times due to situations not much in their control. But that excuse simply doesn’t fly in the face of fiscal irresponsibility. The economy moves in cycles and it’s time the American people learned how to prepare and thrive during those cycles instead of expecting Robin Hood to come save them in the form of cheapening the US Dollar and using other country’s money to finance a stimulus package. True wealth is gained by first stimulating your mind. Go on and marinate on that for a minute.

Note: If you’d like to step-up and start taking control of your financial life today, visit www.myfico.com to find out about your credit score. It’s going to play a huge role in what you’re able to do from here on out.

Note 2: Will the folks at MyFico please cut me a check for that little plug? Thanks. lol.

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2 Responses to “Economic Stimulus Package – What you need to consider”

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  1. 7 Tips to Manage Your Money During a Recession « Seth and Ray’s blog - March 22, 2008

    […] matters in order to maximize your chances of achieving financial freedom. When you get your Economic Stimulus Package, please pay off your debt and save the rest in a high yielding savings account if there’s any […]

  2. 7 Tips to Help Manage Your Money During a Recession - July 22, 2008

    […] matters in order to maximize your chances of achieving financial freedom. When you get your Economic Stimulus Package, please pay off your debt and save the rest in a high yielding savings account if there’s any […]

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