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Bush's Stimulus Plan - Too Little, Too Late?

By Glenn Curtis

Tickers in this Article: WMT

President Bush unveiled a new economic stimulus plan to boost consumer spending and to help get the economy purring again on Friday January 18. At the heart of the stimulus is a package of $140-150 billion in tax relief, relief will probably come in the form of $800 rebate checks.

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But is $800 really going to do the trick, or is it a bit like air-dropping a thimbleful of water on a forest fire.

The Check Might Be In The Mail
Bush offered few specifics on the plan, which would need a Congressional nod to be implemented. However, news reports suggest that the administration's plan for tax relief would come in the form of checks. Individuals would receive a one-time check for $800 and married couples would receive $1,600. The theory is that people will then spend the money and help reinvigorate the overall economy.

In the past, this type of relief has worked. Following the September 11 attack, Bush's 2001 stimulus plan (where individuals received rebates of $300 and households got $600) saw recipients spend two-thirds of their refund within six months according to a study quoted in an Associated Press article. Many credit this stimulus for helping avert a severe recession after the terrorist attacks. (To learn more, see Terrorism's Effects On Wall Street.)

Will it Work Again?
I would argue that this time around rebates might not be as effective because the housing market is in such a deep slump, especially compared to 2001. Many consumers are having a difficult time even meeting their mortgage payments. The Q3 2007 delinquency rate stood at 5.59% according to the Mortgage Banker's Association - its highest level since 1986. Making matters worse, there is also a concern that the roughly 2 million subprime borrowers that face mortgage resets through 2009 may effectively mute such a stimulus package. (For added insight on these problems, check out ARMed And Dangerous and our Subprime Mortgage Feature.)

Incidentally, everyday items such as gas and milk, which constitute a large amount of the consumer's budget, are much more expensive these days. Toward the end of 2007, the average price of gas was $3.05 a gallon. In late 2001 the price was, get this $1.08 a gallon - That's right, $1.08! Meanwhile, milk prices toward the end of 2007 stood at about $3.80 for a gallon, while in 2001 milk was at about $2.43 a gallon. Again, that's a big difference, and I'm not sure how much of an impact a one-time tax relief of $800 will impact a person's spending when they walk in to their local Wal-Mart (NYSE:WMT) and most of their consumer staples are much more expensive than they were just a few years ago.

What Might Work?
In my book, either our politicians need to increase the amount on the checks, or permanently cut income taxes in order to help lift the weight off the average consumer's shoulders. In addition, despite announcing a 75 basis point cut, I feel the Fed should bring down interest rates even further.

If you examine a historical chart of the Fed Funds rate (the rate at which banks borrow from each other), you'll see that post September 11 was almost two points lower than today's level. So, why can't it be the same again? Lowering this rate is important because a lower fed funds rate will bring down prime rates, which, in turn, are the benchmark that many consumer loans are tied to.

The Bottom Line
There is talk that people might be getting $800 rebate checks to get our economy humming again. I doubt a one-time shot in the arm will be enough of a stimulus given the mortgage delinquency rates and the rising cost of commodities such as fuel and milk. In short, getting a check in the mail sounds great, but I think it needs to be more, and I also think that the Fed needs to trim rates even further if we want to avoid the "r" word.

To continue reading on this subject, see Recession: What Does It Mean To Investors?

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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