Economic stimulus act 2008: an analysis

Abstract

The housing bubble in the United States that burst in mid 2007 brought a lot of financial institutions, lenders and bankers, to grief and threw the credit-hungry American economy into a credit crunch. This bursting of the housing bubble, like its Internet and savings and loan predecessors, put the American economy on the brink of a recession. Needless to say, with the complexity of today s financial world and the interconnectedness of financial markets worldwide, this slowdown and possible recession has had a cascading effect on economies across the world, including our own, which is why everyone is now concerned about the state of the American economy. With the aim of providing a quick but sharp boost to the flagging economy, the idea of an emergency stimulus package was propounded early this year. With this purpose, The US Congress passed the Economic Stimulus Act 2008 which was signed into law by President Bushon 13 February, 2008. The act provides for one-time tax rebates for individuals, temporary tax incentives for businesses for capital investment as well as increases limits for mortgages covered by the Federal Housing Administration The aim of this CCS was to analyse the expected impact of these measures and to try to gauge how the US economy would respond to them. We studied the impact of the different provisions of the Act based on analogous studies of the impact of previous stimulus packages, such as the ones implemented in 2001.A study of the individual tax rebates shows that this section of the stimulus is likely to provide a temporary expansion effect on GDP of about 0.67% in the quarter following the rebate, i.e. the third quarter of 2008. We would estimate that any benefit of tax incentives for investment would not be more than $10bn, which is around .07% of the current US GDP. Raising the loan limits and indexing the limits to median house prices is expected to help stabilize, at least in part, a turbulent housing market. The report is structured as follows: Sections 1-3 talk about the origin of the housing and credit crisis and how it spread throughout the real economy. Section 4 explains the provisions of the Act. Section 5 is an analysis of these provisions and assesses their likely impact. Section 6 talks about other measures that could have been included as part of the Act. Sections 7 summarizes the findings.