Wednesday, February 6, 2008

Effect of Stimulus on Green Industry

To combat the recent slowing of the U.S. economy, Congress is currently working to develop a fiscal-oriented stimulus package. The House has approved its version and the Senate is currently attempting to do the same.

The House plan would send rebates of $600-$1,200 to about 111 million Americans who receive paychecks of $3,000 or more, plus an additional $300 per child, with less available to individuals with income in excess of $75,000 and couples making more than $150,000. The Senate version has checks of $500-$1,000 for a broader group that includes 20 million seniors and 250,000 disabled veterans, and taxpayers making up to $150,000 — or $300,000 for individuals. The Senate package also includes a $14.5 billion unemployment extension for those whose benefits have run out, $1 billion in heating aid for the poor — a program that enjoys broad bipartisan support — and a tax break that allows businesses suffering losses to reclaim previously paid taxes. It includes $10 billion in mortgage bonds to help homeowners refinance their loans and several tax breaks for renewable energy. – Houston Chronicle, 2/06/08.

Recent debate over the ability of the $148-$157 billion stimulus package being considered by Congress to actually bolster the domestic economy begs the obvious question: What will be the potential impact of said stimulus on the economy and how much of it will translate into sales of green industry products and services? Not an easy question to address, but perhaps we can glean from the experience of the 2001 stimulus package to draw some conclusions.

In the summer of 2001, the government mailed a total of $38 billion in $300/$600 one-time rebate checks to two-thirds of U.S. households. A 2004 study by U.S. Labor Dept. economists, Princeton University, and the Univ. of Pennsylvania estimated that the rebates increased aggregate consumption expenditures by about 0.8% in the 3rd quarter of 2001 and 0.6% in the 4th quarter. Two University of Michigan economists found that the tax incentive added 100-200,000 jobs and increased GDP by a scant 0.1 to 0.2%. – WSJ, 1/19-20/08, p.A6.

One other [debatable] point is that University of Michigan economists estimated that only 20 percent of the 2001 stimulus rebate check injection was actually spent on consumer goods. The rest was used to either pay down debt or put into savings. -- Austin American Statesman, 1/19/08, p.A17.

Interestingly, this time around, according to Jason Furman at the Brookings Institute, as many as 57 million households (37% of total households) would receive no benefit under the plan as currently structured.

Of the households that may indeed receive rebate checks this year, the timing of their receipt may have an influence on whether any expenditures are made on lawn and garden products and services. If checks are received by mid-to-late May or early June, there may be opportunity for such spending to occur in lawn and garden retail outlets. Otherwise, the vast majority of purchases may end up on ‘unnecessary plastic objects’ from offshore manufacturers (e.g. China) thereby being a primary stimulus for economies other than ours!

Another point to consider is that rebate checks (by themselves) are not likely to spur any lifestyle changes or fund any major asset purchases. This is in keeping with the late economist Milton Friedman’s “permanent income hypothesis” which said that people do not change their spending habits based on small blips in their income. In short, you can’t fool people into thinking they are richer than they really are.

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