Tax Cuts for the Rich, Homebuyer Credit and Corporate Tax Breaks Were a Waste: The CBO did some complex calculations on the “multiplier effect” of the money spent. That is, if a city gets a $1 stimulus grant but spends $2.50 on a project like a new bridge, the multiplier is 2.5. If, on the other hand, a citizen gets a $1 tax credit and only spends 80 cents, the multiplier is 0.8.
Estimates in the report show that direct purchasing of goods and services by the federal government — or similar efforts undertaken by local governments thanks to federal funding — had a multiplier of 1.0 to 2.5 on every dollar spent — showing a big return on Uncle Sam’s investment. The tax cuts for the wealthiest 1% of Americans? A measly 0.2 to 0.6 multiplier. Similarly, the multiplier for the $8,000 tax credit for first-time homebuyers was a paltry 0.3 to 0.8 multiplier. Worst of all, the multiplier on corporate tax provisions was as little as zero and only as high as 0.4. This is not to say that there was no impact from these efforts (unless you believe that low-ball zero multiplier for corporate tax cuts). But in the context of the other figures, the economy would have seen more bang for Uncle Sam’s bucks if the cash was spent via direct investment. Sorry, supply-side supporters …
Short-Sighted and Irrational Americans Will Provide the Biggest Impact: In its methodology, the CBO reveals why it is likely these tax credits to well-off Americans had less of an impact (at least by its calculations). In explaining how it reached some of these numbers, the CBO says other economic models that offer a smaller per-dollar impact of stimulus funds “are generally predicated on the assumption that people are fully rational and forward-looking, basing their current decisions on a full lifetime plan.” Under such a model there are “more modest” impacts on the real economy because “people are assumed to make decisions about how much to work, buy, and save on the basis of current and expected future values of the wage rate, interest rates, taxes, and government purchases, among other things.”
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In short, rational-thinking citizens and businesses who are worried about the future can’t be incited to run out and spend willy nilly, even if the government gives them a handout.
Is it more disappointing that the federal government will depend on such behavior to spur economic growth, or more disappointing that most Americans and American businesses might not actually know any better?
I’ll leave it up to you to decide.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.