Jon Markman

SuperModels1/18/2008 12:01 PM ET

Why Bush's bailout wouldn't work

Everyone from the White House and the presidential candidates to your barber has a plan to ward off a recession -- and they're mostly lousy ideas that'll waste our tax money.

By Jon Markman

That rumbling sound you hear coming from Washington, D.C.? It's Treasury Department helicopters packed with bags full of cash about to be dropped on voters, as the federal government prepares to launch a brazen, desperate election-year effort to rescue the economy.

If you thought the government's delayed response to Hurricane Katrina was a study in out-of-control largesse -- replete with no-strings-attached debit cards handed to anyone with a Cajun accent and a damp shirt -- wait until you see what the government has in mind for the rest of us this year.

The latest is President Bush's just-announced call for $145 billion in tax relief aimed at preventing a recession that is actually already here. The intent of the plan is simple: "Letting Americans keep more of their money should increase consumer spending," the president said. Bush said Congress should take steps to implement a stimulus plan as soon as possible.

As you can see from the stock market's response, the plan suffers from being too little, too late. After years of turning a blind eye to economic imbalances that have thrown thousands of people out of their homes and jobs, Bush now offers the economic equivalent of a Band-Aid. But he's not alone. Members of Congress, presidential candidates and Fed governors have all made promises in the past two weeks to turn the federal piggy bank upside down to ward off the ill effects of a recession.

With so many offering so much, so fast, with so little examination of the real costs, you just know this has to be a bad idea and rife with waste. Yet there's no stopping politicians backed into a corner with their jobs and reputations at stake. More than $200 billion could fall from the skies before the year is done -- a windfall meant to pad the holes in wallets eroded by rising mortgage and gasoline costs, falling home values and lost jobs.

It seems politicians' big idea is that since they couldn't protect us from predatory lenders, outsourcing manufacturers, the crashing dollar and energy speculators, they can at least numb the pain by mailing us $20 bills to rub on our wounds.

Propping up the American consumer

There's definitely a bull market in cynicism, in other words, but I suppose economic naiveté and public pandering have always been growth industries in Washington. Won't those be our own $20 bills, after all? Let's take a look at the proposals and how they might affect our investments.

There are basically two key ways to stimulate a faltering economy: through monetary policy governed by the Federal Reserve or fiscal policy governed by Congress and the president. The first puts more money in circulation through cuts in the cost of credit. The latter is achieved by legislation that sends citizens rebates on taxes or provides more money for public works projects such as highway and airport construction.

The debate between the two types of efforts comes down to a discussion over speed and effectiveness. If the Fed acted now, the effects wouldn't be felt for six months, as lower-interest federal-funds rates worked their way down to auto, home and business loans that people could use to buy the sort of stuff that would boost manufacturing and service activity. The Congress and Bush administration, in contrast, couldn't take action until they reached agreement on such thorny issues as exactly which groups of taxpayers were the most worthy of government attention, how long tax cuts should remain in effect and when the checks should get cut. But once legislation got passed and the Treasury dropped the checks, the effects would likely be immediate.

Now, the problem for most people reading this column online is that the fattest rebate checks probably wouldn't go to you. Sorry, but you probably have a job and a higher-than-average income. The government fears you might do something stupid with the rebate check, like save it.

No, the government is most likely to try to push money to people in lower- to middle-income brackets who are the most likely to go out and blow the money right away on a TV at Best Buy (BBY, news, msgs), a pair of jeans at American Eagle Outfitters (AEO, news, msgs), a Volcom (VLCM, news, msgs) jacket at Zumiez (ZUMZ, news, msgs), a recliner from La-Z-Boy (LZB, news, msgs) or a new compact from Ford (F, news, msgs). Expect beaten-down retailers, apparel makers and consumer-durables manufacturers to rally, in other words, as the stimulus talk heats up.

On the menu: Cash or a tax cut?

Like Bush, the presidential candidates and congressional Democrats have taken the stage to promise the sun, the moon and the sky.

Continued: Fairy-tale fixes

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