What is Wrong with Financial Bailouts? Not a Way of Dealing with Global Financial and Credit Crisis

Back in September, fiscal prudence was the mantra for many elected or hoping-to-be-elected politicians. It was then President-elect Obama who said that, when in a hole, the most prudent course of action is to stop digging. In Canada, too, politicians on both sides of the floor were promising never to run a deficit. That tune has changed radically. Now it’s all about economic stimulus and running justified budget deficits.

Justifying Budget Deficits

It appears that if and when the new U.S. president pushes through his economic stimulus, it will be the first budget deficit measured in trillions of dollars. How can a thousand billion of dollars in the red be justified? Does anyone get scared of these numbers anymore? It also affects the system of Money Exchange in Brisbane as the budget directly links to the economy of country.

Apparently not! It seems the bigger the bailout proposal, the better it is for one’s political status. The promises now revolve around infrastructure spending programs not seen in the U.S. since the 1950s. Money is expected to pour into highways, bridges, commuter train systems, cheap Internet access, waste management, solar energy, etc. The total cost hasn’t been yet estimated, but there is the sum of a trillion-dollar budget deficit being bandied about, which, while it hasn’t been confirmed, hasn’t been denied either.

This is far from saying that economic stimulus isn’t needed. This is not to say that running a deficit is necessarily a bad thing. Government spending usually works. It usually manages to jumpstart the economy. But there is nothing usual about the current economic situation. At the center of the storm is the factor of time, or lack thereof, rather.

The Fast-Decaying Time Value of Bailout Dollars

Let’s follow the cause-and-effect line of reasoning. Consumer spending in the U.S. has not just declined, it has caved in. And consumer and investment confidence is not just low, it is more or less non-existent. Both of these categories are driven to oblivion by skyrocketing unemployment.

Just in October of last year half a million Americans lost their jobs. So perhaps investing in infrastructure is a good idea to bring new jobs online. But the problem is that even if thousands of new jobs are created right now, the benefits of those jobs and personal incomes would take years to filter back into the economy.

Obviously, the time value of bailout dollars at this point is negligible. Mailing checks to consumers, as an instant spending incentive, has also failed miserably. To alter the consumers’ current state of mind, a different kind of incentive is needed; one that will result in people wanting to open their wallets.

What Might Work

For example, only people spending money should receive tax relief. Sure, government will pull in less revenue, but tax reduction is a way of government spending, so an expansionary economic policy in a way. Additionally, cutting one to two percent on sales tax is not likely to do the trick. But what might help could be deep cuts or, better yet, complete removal of sales taxes on a temporary basis. Cutting retail sales taxes would not be felt greatly at a grocery store, true, but the impact on bigger ticket items, such as cars, machinery, home appliances, etc., could be substantial.

Also, instead of bettering the unemployment situation years down this long and treacherous road, how about bettering it right now and giving employers tax relief on payrolls? Again, less tax revenues, but at the prospect of a current potential consumer with a job not having to fear losing it.

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