From an economics standpoint, it is a sound solution at least in theory. As with everything else, the devil is in the details, so whether the administration's approach is the right one, remains to be seen. It really doesn't matter if people spend it on goods, paying down debt, or saving/investing. The end result is the same - cash into the economy.
Brett
Sorry to bring this thread back to a serious note, but actually, from most modern economists standpoints tax rebates are about as poor a choice at stimulating the economy as anything. The Keynesian school of thought was the one that advocated government spending to spurn on the economy, but even the father of that school of thought, John Maynard Keynes, vehemently disagreed with pure handouts as a panacea for every ailment back in the 1940s. Keynesian economics was pretty much killed in the 1970s after stagflation blew its theories to smithereens.
The last time such a gimmick was tried was 2001, and studies showed that the money was primarily used to pay off debt or save. When it was tried before in the mid-1970s, the same thing happened. Demand in no way picked up, and the economy was not stimulated in the desired way. A quick political fix, sure. But in no way did it have a long term economic effect. The economic advancement of the past four years and the Reagan boom is more attributed to marginal rate cuts that changed peoples long term incentives with substantive economic growth vice mere handouts. I like free money just as much as anybody, but there is a cost eventually-- even if it is in the unclear future.
As many have pointed out on this thread, as soon as the money is spent, there is nothing more in terms of consumer spending to stimulate the economy. Incentives are what drive true economic growth, and if a recession is indeed in our economic future, a quick injection six months from now (which would be about when the money would hit the street) would do nothing to forestall it. Whatever would drive the recession would be much deeper than simply pouring cash by pure fiat into our economy. Whatever truly ails the economy will be refined through a downturn, opening the path for growth in the future.
While we obviously dont like recession, in a market-economy, they are necessary, just as wildfires are to preserve a stable ecosystem in the wilderness. There is always a recovery, especially if the market is left to its own devices and the flow of goods adjusts to what consumers actually demand. These recoveries will be more stable and beneficial in the long term than any mandates from policymakers. Some are more protracted than others, often because of unreasonable excess in past booms, but there is always a recovery. (and by unreasonable, i dont mean my subjective beliefs, I am talking about what the market deems unreasonable, like the bundling of subprime mortgages into securities that were ultimately valueless...ultimately unreasonableness is defined by what doesnt hold up to solid, hard economic realities of supply, demand and actual value).
But I suppose the greatest red flag to this proposal is the rapidity with which both the Congress and Presidency agreed to this "stimulus" package. Since the Democrats came to power over a year ago, there has been almost no consensus on ANYTHING. There is currently almost unanimous support, at least in rhetoric, for it across both party lines. Congress has never been known to be economically intelligent, and when the thundering political herd all follow like lemmings to a package that touts free money, you can be sure short-term political gain is what really is driving this legislation.
A great article that goes into greater depth about "costless stimulus" can be found below.
http://online.wsj.com/public/article_print/SB120105051672608359.html
Happy spending!
