Bush Economic Stimulus Package: Pros and Cons

Why Bush's 2008 Rebate Checks Didn't Work

Bush
President George W. Bush. Photo: Alex Wong/Getty Images

The Bush Administration received Congressional approval for its $168 billion economic stimulus package in 2008. President Bush signed the Economic Stimulus Act of 2008 on February 13, 2008. He wanted to prevent a recession.

The 2006  housing market slowdown had affected the economy. In September 2007, Libor rates began rising above the fed funds rate. That meant banks were afraid to lend to each other.

They had too many subprime mortgages on their books. Many held mortgage-backed securities that had become worthless. Bank reliance on derivatives to boost profits would lead to the 2008 financial crisis. For details, see Role of Derivatives in the 2008 Financial Crisis.

Details

The package eliminated taxes on the first $6,000 of taxable income for individuals and the first $12,000 of income for couples. A rebate check was mailed out to 130 million taxpayers, in amounts as follows:

  • Individuals would receive up to $600.
  • Married couples would get up to $1,200.
  • Those with children would be sent $300 per dependent child.

The rebate amounts were reduced for individuals with incomes over $75,000 and couples with incomes over $150,000.

The Bush stimulus sent 20 million retirees on Social Security and disabled veterans a check. They received $300 each, or $600 for couples, if they earned at least $3,000 in 2007 in benefits.

But those who were only on SSI did not receive checks. 

The Bush stimulus also raised loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration. This was intended to remove subprime mortgages from banks' balance sheets. It also allowed the government-sponsored agencies to take on more toxic debt.

That led to Fannie and Freddie's bankruptcy later that year.

The package was intended to save businesses $50 billion. It allowed them to deduct an extra 50 percent off new equipment purchases. It also increased expense allowances for small businesses. (Source: "New Growth Package Fact Sheet," White House, January 24, 2008. "Congress Approves Economic Stimulus Bill," The Wall Street Journal, February 8, 2008.)

Pros

The Bush stimulus program totaled about 1 percent of gross domestic product. Advocates of the bill said that was large enough to impact the $14 trillion economy. Most economists agreed that tax rebates would immediately lift consumer spending. That's especially true if rebates are targeted for low-income families who were more likely to spend it than save it. For example, the 2001 rebate checks increased total consumption by 0.8 percent in the quarter that the checks were received and 0.6 percent in the subsequent quarter.

The business tax relief gave companies an incentive to expand that year. That typically would have been used to create new jobs. But it wasn't enough to offset the panic created by the 2008 financial crisis. 

Rebate checks are better than tax cuts. According to estimates by Economy.com, each rebate dollar spent generated $1.19 in additional GDP.

Reductions in tax rates produced only 59 cents additional GDP per dollar spent. (Source: "Bush Calls for $145 Billion Stimulus Package for Economy," International Herald Tribune, January 18, 2008.)

Cons

By the time the checks arrived in taxpayers' hands, it was late summer. That was too late to impact the first half of the year.

It was also too late to prevent the recession. By that time, Fannie Mae and Freddie Mac were nearing bankruptcy. These two either held or guaranteed half of the nation's mortgages. On July 22, 2008, U.S. Treasury Secretary Henry Paulson asked Congress to allow the Treasury Department to guarantee $25 billion in subprime mortgages held by Fannie and Freddie. The news sent their stock prices plummeting, effectively wiping them out. On July 23, Congress authorized the Treasury to bail out and nationalize them to save the U.S. housing market.

 Here are the details of the Fannie and Freddie bailout.

Even if the checks had arrived sooner, they wouldn't have made much difference. Tax rebate checks are not an efficient way to stimulate the economy. The biggest impact is made by increases in unemployment benefits. They produce about $1.73 in demand for every dollar spent, according to the Economy.com study.

Perhaps most important, the tax cuts weren't balanced by a decrease in government spending. This led to a $500 billion budget deficit. By the time Bush left office, the federal debt had doubled to $10 trillion. This contributed downward pressure on the dollar. That leads to higher oil prices and inflation over the long run.