Later this week when Mr and Mrs America get home from work there will be a nice surprise sitting on the doorstep: a nice big juicy cheque for $1,200 for them to spend as they like, courtesy of the US government. This is the big one, all the other measures taken up to now, in comparison, are child’s play.  It’s a big gamble, sure, but in trying to boost the economy this way, George Dubya and his advisers are doing exactly what Keynes would have recommended. 

It’s a shame of course that the British government can’t do the same thing because if there was one thing that could kick some life into the UK economy right now it would be a massive, one-off, pay day for all households.  But you know the reasons why they say the trick can’t be repeated over here.

But this begs the question: will the big tax credit do the trick? The answer to that is important, because it has implications far beyond the US.

Actually, there won’t really be a cheque waiting on the doorstep the money is being transferred electronically.  Furthermore, a mere 7 million rebates will be leaving the government’s bank account.  The rest of the 117 million households will have to wait a little longer. May 9 is the day marked on the calendar for the cheques to start going out, and at that point it really will be a case of sending the cheque in the post, so let’s hope the White House has got lots of self-adhesive envelopes and stamps, otherwise George Dubya will soon run out of spit.

Individuals will be getting $600, and couples $1,200, in a move that will set the government back around $160 billion. In the long run, of course, taxpayers will be paying for the credit, so in effect the government has decided that all taxpayers are to borrow against future earnings.

But the move does have one important feature.  The tax credit is not dependent on earnings.  In that sense it is like the complete opposite of the tax that brought Mrs Thatcher’s reign to an end the poll tax.  But this is a poll credit.

So actually, although the US taxpayer will be no better off in the longer-term, the rebate will have created a massive re-distribution effect so in a way, George Dubya  has taken on something of a Robin Hood persona.

But, then again, it is what Keynes would have diagnosed. His reasoning went like this: when debt is high, cutting interest rates is not the way to get the economy moving.  Or to put it another way, you can’t solve a problem of too much debt, by getting people to borrow more.  It would be akin to pushing on string,said Keynes. Instead, he said the answer was to hand out more money to people who tended to have a higher spending to saving ratio the poor.  Get more money to the poorer folks, and they will spend it and the economy’s lifeblood will start flowing again.  Give money to the rich, on the other hand, and they are more likely to save it.

That, though, is a problem this time round, because the poor US households, struggling with their sub-prime mortgages, are, on this occasion, also quite likely to save the money.

And therein lies the big doubt with the move.  Many economists fear that the majority of the money being handed out won’t be spent at all, rather it will be saved or used to repay debt and have a negligible effect upon the US economy 2008.

In fact, if the famous Sheriff of Nottingham from King John’s time was still alive today, and was now practising as an economist, he might even have advocated giving more of the rebate to the rich.

But actually, even if all the money was saved, rather than spent, it would be no bad thing in the long-term.  Just like the banks, US households need to shore up their balance sheets. 

US and UK banks  might not be passing the new money handed to them by central banks on to customers in the form of lower interest charges but they are repairing their damaged balance sheet. 

That’s why neither the big US tax credit, nor the efforts by the Fed and Bank of England to resuscitate the money markets, may be enough to save the economy in 2008, but they should be enough to bring forward the eventual recovery.

© Investment & Business News 2013