Introduction and Economic Situation at the Time of the Action
Fiscal policy refers to the act of intervention by a government in an economy by adjusting its expenditure and tax rates, to oversee and influence the nation’s economic performance (Auerbach & Gale, 2009). The Economic Stimulus Act of 2008 involved the intervention of the United States government in the national economy through its Economic Stimulus Payments (EPSs), which primarily factored a 100 billion dollars program. The program’s aim was sending tax rebates and disbursing stimulus payments to the low-income households as a remedy for severe financial crisis that began in 2017 (Parker et al., 2013). This was done through mailing and direct deposits into taxpayers’ bank accounts (Shapiro & Slemrod, 2009). The congress approved this act in January and it was enacted into a law on the 13th of February, 2008. It authorized disbursement of stimulus payments including a basic payment and supplement compensation of 300 dollars per child eligible for the child tax credit to rectify low consumer demands experienced during the crisis (Broda & aparker, 2014).
Economic Analysis
These tax rebates spearheaded by U.S. government during President Bush’s regime aimed at raising the consumer demand by the households (Broda & aparker, 2014). However, it had consequential implications on various areas of the economy.
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"Economic Stimulus Act of 2008".
Household (Consumption)
Tax rebates were meant for improving the low-income households’ propensity to consume. This increased the levels of disposable income during the second quarter of 2008, and it introduced approximately 332 billion dollars at an annual rate in income and 61.4 billion dollars at a yearly rate in the second and third quarters of 2008 respectively (Shapiro & Slemrod, 2009). Despite the sharp increase in the disposable income, statistics however, show that only one-third of the 2008 tax rebates were spent on consumption (Shapiro & Slemrod, 2009). Majority of the beneficiaries spent the income on savings and paying off their debts. However, the average amounts of the rebates were significant to an extent that they yielded a detectable result on the GDP and expenditure growth during the second and third quarters of 2018 and less impact thereafter (Shapiro & Slemrod, 2009). Due to the low consumption propensity, this rebate yielded only a small impact as economic stimulus because cash was provided to the consumers who spent it on savings and paying debts, boosting their well-being but not necessarily spending it on consumption (Tylor, 2009).
Firms (Investments)
From an economic perspective, investment prices ought to completely exhibit temporary tax subsidies, regardless of the investment supply flexibility. Prices move proportionally and in the same direction with the subsidies, which validates the derivative of elasticity from quantities alone (House & Shapiro, 2008). Moreover, a reduction in taxation rate is an incentive for investments, implying that reduction in taxes results to increase in investment levels. Therefore, tax rebates provided strong short run incentives to investments. However, tax rebates failed to induce economic growth and development because it was not interconnected with productivity and work effort (Reid, 2008). This is because, there was no new revenue generated since no one was obligated to grind, invest, and save more to obtain a rebate. Therefore, government’s provision of tax rebate was an attempt to induce new purchasing power out of thin air, rather than encouraging creation of income through new ventures and stimulation of private domestic investments (Reid, 2008). Similarly, the incentives to investments were short-lived and declined drastically thereafter, just like the household consumer demand.
Government (Government spending, Taxes, and Transfer Payments)
Consequently, attempts by the government to increase households’ consumption demand out of thin air though provision of tax rebates and transfer payments raised the government’s expenditure (Cogan et al., 2010). The stimulus act involved significantly large amount of funds and tax rebate to induce consumer demand, amount that the government could either have acquired through taxation or borrowing. Although it was a short-term policy, the whole subsidization hiked the government’s expenditure, which was not later re-circulated back to the economy since the households held these monies as savings and spent only a small fraction on purchasing consumables (Shapiro & Slemrod, 2009).
Net Exports (Imports and Exports)
Additionally, due to the tax rebates failure to induce investments and general economic growth, it had a negligible effect on the production levels in the economy and eventually no incentives to export. During the financial Crisis, there were minimal transactions between the U.S. and international markets, as the level of domestic production was quite low. This could result into a deficit in balance of payment, which refers to the history of all economic undertakings between the American residents and the entire world during the crisis period (Busierre, 2013). The crisis persisted until 2009 despite all the efforts in tax rebates, implying that exportation levels were minimum during this period.
Conclusion
Indeed, he economic stimulus act had various advantages, although with adverse demerits in the long-run. When the government intervened in the economy by implementing expansionary fiscal policy (by introducing Economic stimulus though tax rebates and EPSs), the motive was to boost consumer demand and to induce investments in the economy. A rise in consumer demand leads to injection of revenues back to the economy through purchases, which ensures a steady circulation of money and a smooth growth of the economy. However, this goal was not attained despite all the efforts of subsidization to the low-income households. This is because the households spent only a small fraction of the income on consumption and held the remaining income as savings. This implies that consumer demand increased just slightly compared to the projected goal, and even declined further after the stimulus act. On the other hand, the government’s stimulus act provided only short-term incentives to investments. This had only a short-term effect on investments and production levels in the economy. The government could embark on temporary tax incentives for commercial activities and business ventures, similar to the bonus reduction provision approved in 2003. This would spark the economy by elevating expenditures for business paraphernalia and structures (Elmendorf & Jason, 2008). Additionally, this will encourage exportation as a result of stimulated domestic investment and production hence improving the Balance of Payment (BOP) and general economic performance. Therefore, the Economic Stimulus Act did not have a significant impact as a remedy to the financial crisis experienced in the U.S. in 2007. Hence, the individuals and institutions involved in designing future economic stimulus package should factor-in the fact that most of the tax rebate might not be spent as well.
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