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A second round of tax rebates likely, U. of I. economist says

11/3/2008

Jan Dennis, Business & Law Editor
217-333-0568; jdennis@illinois.edu

Giertz
Click photo to enlarge
Photo by L. Brian Stauffer
Economist J. Fred Giertz says Congress will likely approve a new economic stimulus package that could top the $600 tax rebate checks doled out this year, no matter who wins the race for the White House.

CHAMPAIGN, Ill. — Taxpayers may be in store for another windfall next year as the federal government tries to prop up an economy that could be spiraling toward its deepest recession in nearly three decades, a University of Illinois economist predicts.

J. Fred Giertz says Congress will likely approve a new economic stimulus package that could top the $600 tax rebate checks doled out this year, no matter whether Democrat Barack Obama or Republican John McCain wins the race for the White House.

“I wouldn’t be surprised if it happens right after the election, before the new president takes office. I suspect whoever wins would endorse it,” Giertz said. “It’s probably a good idea. It has some impact and shows the government is concerned and addressing our economic problems.”

He says the odds of a new stimulus package rose last week when the Commerce Department reported the nation’s gross domestic product shrank in the third quarter, virtually assuring a recession since an even steeper GNP decline is forecast for the fourth quarter.

“Politicians like to appear to be proactive, so even though rebates don’t have as much impact as you might think, they’re a step in what politicians think is the right direction,” said Giertz, a member of the university’s Institute of Government and Public Affairs.

The last round of rebates seemed to be effective, he said, fueling a surprising 2 ½ percent GDP surge in the second quarter, well ahead of the slight growth that had been predicted. But he says the impact waned quickly, and likely would again if Congress turns to a new stimulus plan.

“Temporary tax cuts and rebates have an impact, but not a lasting impact because people don’t change their spending habits as much in response to a temporary change as they do to a permanent change,” Giertz said. “But we’re really not in a position to have a big, permanent tax cut now because of our other problems – the national debt and looming social insurance issues.”

He says a new stimulus package would have to be as big or bigger than this year’s roughly $150 billion plan because the nation’s economy has slumped deeper amid a broad financial meltdown and credit crisis.

Even then, rebates would be just a bandage for the economy, not a cure, said Giertz, the interim head of the economics department.

“I don’t think another rebate package would magically move the economy back into positive territory, but it would keep the recession from going as deep as it might have otherwise,” he said.

Fears that the U.S. economy could sink to levels rivaling the Great Depression have eased, Giertz said, buoyed by a $700 billion Wall Street bailout and cooperation among central banks to ward off a global credit crisis.

“If we hadn’t solved the financial meltdown, things could have gotten really ugly,” he said.  “A catastrophic situation seems to be much less likely than it was a month or two ago. But there’s still a small possibility of a really bad outcome, so I think there’s something yet to worry about.”

Even if the economy averts disaster, Giertz says the nation is likely headed for its deepest recession since 1980-81, when jobless rates rose to about 10 percent.

Although unemployment likely won’t reach double digits this time, he says it could top the 6 to 7 percent jobless rates during the most recent recessions in 1990 and 2001.

While a deeper downturn is still possible, Giertz says he takes solace from last week’s vote by the Federal Reserve that trimmed federal funds rates from 1 ½ percent to 1 percent, signaling a move back to traditional policy and away from heroic measures.

“Raising or lowering the federal funds rate is an issue the Fed deals with every few weeks, so I’m pleased we’re worrying about those kinds of decisions rather than how to keep the banking system from collapsing or keeping an insurance company from going bankrupt,” he said. “Getting back to more normal kinds of decisions suggests more faith in the economy than some people realize.”

Editor’s note: To contact J. Fred Giertz, call 217-244-3108; e-mail jgiertz@illinois.edu.