Dave Barry Explains the Tax Rebate

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The tax rebate of 2008, which is scheduled to begin this week when the first checks go into the mail, is the latest example of American mercantilism in action. I did my best to explain American mercantilism in the April 26 issue of Gary North’s Reality Check. There, I explained modern Keynesian economics as the American version of mercantilism.

My article, “Climbing of China’s Paper Money Tiger,” warned that the United States has adopted the Keynesian version of mercantilism: national consumption without production. It is a perfect match for China’s more traditional mercantilism, national production without consumption. You can read my analysis here.

While I do my best to make economics clear, I am no match for America’s most beloved retired humorist, Dave Barry. Breaking his book royalty-based silence, he has offered a stunningly brilliant insight into the likely economic effects of the 2008 tax rebate, which is called an Economic Stimulus Payment. I can do no better than to quote him verbatim.
Q. What is an Economic Stimulus Payment?

A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?

A. From taxpayers.

Q. So the government is giving me back my own money?

A. Only a smidgen.

Q. What is the purpose of this payment?

A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn’t that stimulating the economy of China?

A. Shut up.

In presenting this analysis, he offered neither a graph nor an equation. He will therefore not receive the 2009 Nobel Prize in Economic Science and the $1.6 million economic stimulus payment it brings. But his analysis, I predict, will turn out to be far more relevant and unquestionably more coherent than any analysis ever offered by next year’s prize winner.

GOOD NEWS AND BAD NEWS

The good news is that the Federal government is sending a little tax-free money back to us. Never look a gift horse in the mouth, especially when it’s coming from the horse thief who stole it from you.

The bad news is that this money will be borrowed. Every penny will be added to the on-budget debt of the United States government.

What is the estimated deficit today for fiscal 2008? This figure is buried in the recently released report, “The Cyclically Adjusted and Standardized Budget Estimates” (April 2008). The figure is $361 billion. A year ago, it was $162 billion (Table 1, p. 3).

Next year, the CBO estimates, the deficit will be a mere $133 billion. Write that figure down in your diary of accounting illusions. (The phrase “Arthur Andersen” comes to mind.)

On March 12, the Treasury made its estimate: $410 billion. This was the same as in February.

These are large figures. We are only in the early stage of a recession. It has barely begun to raise the unemployment rate. Yet consumer confidence is at the lowest level since the recession of 1982 (Reuters/University of Michigan Surveys of Consumers). Recall that 1982 was the year of the low point of the Dow: 777 (August). Today’s loss of confidence has not yet affected the stock market significantly. Optimism still reigns among most stock market investors.

As the deficit soars, which it will, the government will absorb more resources that would have gone into the private sector. This is denied by Keynesians and some monetarists, but this process is obvious. In a recession, investors seek safety. They want to protect themselves against falling stocks and bankrupt corporations. They buy Federal government-issued debt on the assumption that the Federal government will not default in a recession. This money does not go to fund private capital.

This is bad for the economy but good — in the short run — for investors. Because the government is involved, we get the reverse of Bernard Mandeville’s pathbreaking book and poem, Fable of the Bees: Private Vices, Public Benefits (1714). We get private benefits and public vices.

PRIVATE SPENDING

I am in favor of tax-free rebates from the Federal government — any time, any place, any amount. Just send out the checks. The taxpayers can do better things with their money than the Federal government can.

So, I am in favor of Federal deficits, if the alternative is higher taxes. I am in favor of lower taxes, even if these lead to higher deficits. I think the Federal government will not cut spending for any reason but one: bankruptcy. So, as long as the beast is going to spend money, it might as well raise it by borrowing. Let the people who trust the government wind up as creditors to the government. When the government defaults, one way or the other, those hurt most will be those who trusted politicians the most. This is as it should be. There is a kind of raw justice in the arrangement.

The assumption of the politicians and Keynesian economists is that what is needed is consumer spending. But why shouldn’t taxpayers put their money into savings? Why not fund the private sector? The hostility of Keynesians to thrift is legendary. They believe that consumption stimulates the economy. They ignore what economists had argued for two centuries before Keynes (except for Mandeville, a dentist): (1) consumption comes from prior production; (2) production comes from an increased supply of capital; (3) so, an increase in the supply of capital leads to increased consumption.

Will the rebate recipients save most of the money? Probably not. They will pay their bills. The best we can reasonably hope for is that they pay off their credit card debt or other forms of non-mortgage debt. This will get them out of the habit of borrowing to buy consumer goods. But people today are emotional Keynesians, even if they have never heard of Keynes. They believe in spending their way to wealth.

The politicians know their marks. They assume that a large percentage of voters will use this money to buy consumer goods and services. They assume, as Keynesians always assume, that consumer spending will stimulate the U.S. economy. This will provide profits for retailers. It will convince producers to produce even more.

But why should producers produce any more? This is a one-shot rebate. Spending will reduce inventories of unsold goods, but it will not convince producers to order more raw materials, hire more workers, or cut back on their cutbacks.

Retailers around the country are offering deals for shoppers with a little extra money in their bank accounts. How much money are we talking about? In total, about $106 billion. The expectation is that over $40 billion will go directly into the retail sector.

To imagine that this will in some significant way roll back the recession is grasping at economic straws. But the vote was mainly about grasping at political straws. It was one more example of politicians’ unwillingness to sit there and do nothing, meaning spend nothing. This, they will not do. They did not want to go into the November election with a target on each of their backs: “He did nothing to fight the recession.”

WHAT TO DO WITH THE MONEY

On March 8, I sent out this report in my weekly “Tip of the Week.”
What is the best thing to do with your income tax refund, i.e., the return of your enforced, interest-free “loan” to the U.S. Treasury?

If you have any credit card debt, pay off principal.

If you have no credit card debt, pay down some other debt, other than your mortgage.

If you have no debt to pay down, make a contribution to your IRA.

If you are maxed out on your IRA, set the money aside in a special bank account for your next car repair or new tires. This way, you can avoid charging this to your credit card. If you can get an extra year out of your car, you can defer purchasing a new car for another year. (Do this for the next five years. Then buy a used car.)

What you should not do is use any of the money to fund a consumer purchase. The money should be used to pay down non-tax-deductible debt, if you have any, or increase a thrift account.

I realize that this isn’t much fun. But recessions are not much fun except for entrepreneurs with cash reserves who buy distressed property.

CONCLUSION

Keynes was wrong. What we need is less government spending. But since we’re not going to get it, no matter what we do or how we vote, let’s give Keynesian politicians two cheers for the rebate. The money is better in our bank accounts than the government’s bank account.

The government will spend every dime that comes in. It is buying votes, and it is always in that market spending whatever it can beg, borrow, or steal.

We will spend the money, too. The question is: On what? On the future.

Fifty years ago, Mort Sahl revolutionized American comedy with his album, The Future Lies Ahead. He could have easily gotten his basic idea across with the addition of a colon: The Future: Lies Ahead. The biggest lie of all is that the government is competent to spend our money better than we can.

So, enjoy your rebate. Do something useful with it. Save it.

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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