Insights & Advice


One for the Little Guy

Congress passed the Obama $819 billion stimulus package Wednesday night and it actually had some incentives for the economically-challenged lower and middle class. I say it’s about time although we are still some weeks away from a final bill.

I’m not sure what surprises me more, that a presidential candidate actually fulfilled a campaign promise or that those promises passed through Congress in a matter of days. The President’s “Making Work Pay” part of the package amounts to a $500 tax credit for every worker ($1,000 for families) which phases out for those who make over $75,000 ($150,000 for married couples filing jointly). It won’t be paid in one lump sum like last year’s stimulus check however. It will be either a reduction in our paychecks or used as a credit against our taxes at the end of the year.

If you are on unemployment, your benefits would become tax free under the bill and you may also get some help in paying for your health-care coverage. My wife is unemployed so I know this is a big deal for us since even withholding 10% from her unemployment check hurts and her monthly COPRA health care benefits are expensive.

For lower income workers, $4.7 billion of the bill would go to increase the Earned Income Tax Credit as well as the per-child tax credit. America’s retirees, disabled individuals and those on Social Security were not forgotten. Each would receive an additional $300 payment as well. The bill still needs to pass the Senate next week so no one yet knows how much of the tax breaks will be temporary or long –term.

There is also some talk that the first time home buyer’s $7,500 tax credit passed last year may be extended beyond its sunset date of June 30, 2009. This was not exactly a credit but rather a 15 year interest free loan that would be repaid by the qualified homebuyer. It was crafted as a temporary incentive to jump-start the buying of homes by new buyers but failed dismally. This time around the terms may be changed and the credit could actually be a freebie for those who have never owned a home (or at least not for the last three years) and do not make over $75,000 ($150,000 for a married couple filing jointly).

Naturally many on Wall Street are howling that all this additional money will balloon the deficit even further and that this kind of stimulus won’t work or will be temporary at best. I say consider the source. These were the same people who were begging the government last year to bail-out the money center banks, the brokers and investment banks that got us into this mess in the first place. We did what they wanted and what happened? They stashed the money away instead of lending it. And when they did spend it, how was it spent: in redecorating offices, dolling out billions in bonuses and speculating in the oil markets. But let me change the subject before I loose my temper.

Some readers may recall a former column in which I argued that our auto industry should be consolidated (“The Big Three should become the Big One”). At the time I suggested that one way to combat declining auto sales was to give consumers an incentive by allowing them to deduct interest on new car loans in the same way our mortgage interest is tax deductible. Lo and behold, someone in Washington must be reading my columns, since a bill was introduced by Senator Barbara Mikulski (D-Md.) and Representative Bill Pascrell (D-N.J.) which would do just that for auto loans of up to $49,500. Anyone making less than $150,000 ($250,000 if married and filing jointly) would qualify.

There is also another bill called “cash for clunkers” introduced by Senator Dianne Feinstein (D-Ca.) that would give owners of old, fuel inefficient autos thousands of dollars toward the purchase of newer, fuel efficient vehicles. Either bill may help to sell cars and maybe a lot of them if the final bill is a temporary measure. Why temporary? Because if the consumer believes the legislation was permanent, I think she would just wait until the economy recovered before making the purchase. That would not help the auto companies today.

President Obama said he would like to sign the bill by President’s Day or earlier so there is still time remaining for some horse trading between the political parties and their factions. Notably not one Republican voted for the House version of the bill. So there are likely to be twists and turns, add-ons and subtracts before the final passage of the bill but from this columnist’s perspective it’s a relief to see an administration that is finally trying to take care of the little guy in this crisis.
Whether it will truly help the economy turn the corner is another question and one I will answer in a later column.

Posted in Macroeconomics, The Retired Advisor