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Friday, January 18, 2008

Stimulus Package Gives Market "Oomph!"

Stocks are set to open much higher this morning on the news that Washington may have gotten its act together to put together an economic stimulus package. The number being bandied about is $100 million to $150 million. Importantly, as the Wall Street Journal tells us …

The administration also signaled it would accept a stimulus bill that didn't include an extension of Mr. Bush's tax cuts -- a centerpiece of his economic agenda -- removing a potential hurdle to bipartisan support for the legislation.

Why is this important? As economist Paul Krugman detailed on his blog on Tuesday …

If this Times report is at all right, Republicans will hold any attempt to help the economy now hostage to yet another try at making the Bush tax cuts permanent.

But apparently the last few days of red-ink market action have overwhelmed Republican intransigence.

The Democrats also gave something, as the Wall Street Journal tells us …

Congressional Democrats, meanwhile, are suggesting they would be willing to suspend their budget rules and agree to tax breaks without first finding ways to pay for them. They also indicated willingness to add some incentives for business, usually a key Republican demand in economic-stimulus efforts

So what will the stimulus package look like? Again, from the Wall Street Journal …

The stimulus package could end up resembling the 2001 stimulus plan, which was widely regarded as well-timed and effective in keeping that year's recession mild. In that package, which Mr. Bush supported, married couples got as much as $600 in tax rebates and single tax filers as much as $300. The rebates were based on the new 10% bottom tax bracket that the 2001 legislation created. The lowest bracket previously had been 15%.

This time around, the rebate could eventually be as much as $800 for individuals, $1,600 for married couples, according to some officials. The rebates would be created, in effect, by temporarily eliminating the 10% tax bracket. Because the government is in the midst of the tax-filing season for 2007, it could take several months -- perhaps until June -- for rebate checks to make it into the hands of taxpayers.

Now the question is, will a stimulus package actually do any good? The general consensus on CNBC is that if you give people an extra $800, and they’re worried about the economy, they’ll tend to stick that money in the bank. So, the stimulus plan has to be more than tax rebates.

What would MY stimulus plan be? I’m so glad you asked.

I wouldn’t give tax rebates. I’d spend the $150 million on jobs, technology and material to make us more energy independent. “Green-energy” jobs to “solar-wire” our cities, rehabilitate light rail, and put a wind-generator on every frakking farm in the country. And when possible, Buy American to get the parts and material.

That’s what I would do. But no one asks me. On the other hand, my stimulus plan would probably take longer to get rolling than a "hand out money" plan, and both Wall Street and Washington have decided they want this stimulus NOW. So perhaps my solution is not the solution for the problem at hand.

I can tell you this -- if the government starts throwing money at problems, that is inflationary. That is a boost for gold and oil prices, and one that is separate from the boost we should see as the Fed continues to cut interest rates.

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