$1,200 Out of Thin Air

What would you do if $1,200 appeared in your bank account out of thin air? How about $600? If most American's answer this question honestly, we would admit that our money is spent on "things." Extra cash is rarely used to advance our financial situation. Windfalls trigger a psychological reaction in most people that makes them feel like the money is more expendable or somehow less important than regular earnings.

A windfall is currently in the works for most Americans. According to media reports legislation will soon be passed for an economic stimulus package that will provide a tax rebate $1,200 for married couples, $600 for single filers, and $300 for each child in the household. Filers which were exempt from federal taxes but had earned income of $3,000 or more will receive $300.

I am not a (trained) economist but here is my "back of the envelope" analysis of the efficacy of this proposal. For every rebate dollar that is spent, America would need to grow the economy that much, plus the interest rate from the treasury bonds that it issues to cover the national debt. If the goods bought by consumers with the rebate mirror that of the broad economy approximately 6.15% of the total funds will flow outside the United States via the trade imbalance ($800 Billion trade deficit / $13,000 Billion GDP). For a $150 Billion rebate plan, domestic spending would then amount to roughly $140 Billion. The the interest rate for the borrowed money is roughly approximated by the 30 year treasury rate, which as of today was 4.36%. The overall result is that in order to break even the domestic economy would need to sustain a 4.6% return on the $140 Billion spent on US goods over 30 years in order to break even.

I was highly skeptical when I first read of this plan for a number of reasons, but as it turns out creating the needed 4.6% return is historically very realistic. It would seem that borrowing money to increase consumer spending at current rates may in fact be a bargain. While it may not fix the immediate credit crunch, slumping real estate market, or a broad recession this plan can have some positive effects.

I know that I will be sure to make any windfall I receive a part of my total financial plan to pay down debt, save for retirement, and build my emergency fund. I will also take about 10% and guiltlessly buy myself a new toy or gadget. I mean hey, spending helps the economy right?

* Update 2/11/08 *

The stimulus package has been passed by both the House and Senate in a form nearly identical to the one outlined in my original post. The primary change is that retirees on Social Security and disabled veterans are now included in the bill and will get rebate checks too. The bill is set to be signed into law on Wednesday. I have not changed my overall position, that this move will be beneficial to the growth of our economy. If you have an opinion please feel free to add comments below.