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What if they just gave the bailout money?

The government's latest handout to investors looking to profit on the bank bailout has readers: why not just give the money directly to taxpayers? The Answer Desk.
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With the government's latest handout to investors looking to profit on the bank bailout, more than one reader is wondering: Why doesn't the government just give the money directly to taxpayers?

Why isn't the stimulus money being given to the taxpayers that are going to have to pay for it? I keep hearing that this would be about $500,000 each, which would go to pay off mortgages, buy cars, vacations, you name it. Wouldn't this do more to "kick-start" the economy?
— Gary J., Greenville, S.C.

It sure seems like you and I have somehow gotten left off the list of people getting some of those trillions of bailout dollars the government is handing out.

Maybe it’s because the government isn’t sure exactly how many of us are out here. (More on that in a minute.) But it wouldn’t come close to $500,000 a head. And it’s not clear it would provide the “kick start” we’re all looking for.

So far, the list of bailout recipients includes banks (some of whom got us into this mess in the first place), a failed insurance company (ditto), car companies, foreign central banks, and investors who are getting risk-free loans to profit from buying up bad bank assets. Congress is doling out hundreds of billions more to state and local governments, schools, health care providers and people who build roads and bridges for a living.

To be sure, there is some money in there for individual taxpayers: roughly $360 billion. Most of that money will pay for tax cuts targeted to specific groups — including people with the lowest incomes, first-time home buyers, people whose unemployment benefits are about to run out or the rapidly growing middle-income households who are being victimized by the "alternative minimum tax" originally created to make rich people pay their fair share. Some of these people who are eligible for a tax cut, and don’t owe any taxes, get a “refundable tax credit” (aka “a check.”)

Figuring out how much we’d all get if the government gave the rest of that money directly to taxpayers turns out to be harder than it looks. Though the Federal Reserve has doled out several trillion dollars (so far) that money represents loans backed by collateral that includes other forms of debt. This, after all, is what the Fed does in “normal” economic conditions: it swaps its Federal Reserve Notes (aka “cash”) for U.S. Treasuries held by banks and other “primary dealers” in the financial system.

To pump more money into the system, the Fed usually pays cash for Treasuries; to drain cash, it sells them back. Despite a massive expansion of lending since last September, the only real change has been the types of debt the Fed is accepting and the companies it does business with. The list of both has gotten much longer.

The Treasury, on the other hand, is spending our money and getting no hard assets in return. The $787 billion “stimulus package” is money the government won’t get back. The other big chunk of change, the $700 billion Troubled Asset Relief Plan, or TARP, is being invested in bank stock and, soon, to help investors buy chancey loans and bonds backed by dicey mortgages.

These assets are worth something, but no one knows how much because no one can predict how much further the economy will slide and how many more homeowners will default on their mortgages. If all this paper changes hands at a steep enough discount, the government might actually make money on the deal — which they'll split with investors who took none of the risk. For investors, it's a "heads I win, tails I don't lose" deal.

So far, the money that’s been actually spent (not lent with a good chance of it coming back) comes to about $1 trillion (this year’s $787 billion stimulus package plus the last year's $168 billion stimulus that was mostly paid out as tax rebate checks.)

So how much would every taxpayer get if that $1 trillion went directly to individuals? That’s hard to say. The IRS estimates there will be roughly 154 million individual returns filed in 2008, but many of those are joint returns filed by married couples. Because of the way it collects its data, the IRS can’t say exactly how many people those returns represent. Same goes for the Joint Committee on Taxation – the arm of Congress that handles tax matters. (You’d think Congress would at least want to have a rough estimate of how many taxpayers there are out here.)

The Tax Foundation, a private research group, estimates there are 194 million of us who file income tax returns, individually or jointly, though many don’t end up owing tax. (And some get that "refundable tax credit.") But if you spread $1 trillion evenly over 194 million people, each of us would get a check for $5,154.64.

That certainly would be a nice little bonus. Not exactly AIG material, but it would relieve at least some of the financial pain most taxpayers are feeling right now. But it wouldn’t come close to replacing the trillions of dollars in lost home values or the trillions more in retirement savings and investment losses. That huge money crater is the main reason the economy is in a tailspin.

To pay you a $500,000 bonus, the government would need to borrow roughly $100 trillion, and there just isn’t that much available wealth on the planet. (If the government created that much money, the surge in inflation would mean you’d use up your $500,000 to order a pizza.) You also probably wouldn’t get the biggest economic bang for all those bucks.

It turns out when times are tough, people tend to take a windfall and save it for an even rainier day. That’s what happened to a lot of the money that was handed out in tax rebates last year. There was a noticeable uptick in retail sales as the checks cleared, but sales fell right back down again — and kept falling — as home prices fell and unemployment rose. That’s why Congress took a different tack this time around.

Economists say the best way to stimulate the economy is to put the money where it has the highest “multiplier effect.” If the money is targeted to build a highway, for example, those dollars start off on the books of the contractor with the winning bid. The contractor then keeps a little in profit, which gets spent to buy a new backhoe or pay for groceries for the contractor’s family. Most of the money goes to pay for labor and materials; the workers take the original dollar and spend it again on, say, a new set of tires for the pickup truck that gets them to work. The tire shop owner spends the dollar a fourth time — maybe it goes back to the tire plant, where the manager can call up a worker who’s been laid off and turn the dollar over yet again, so the newly rehired worker can take her family out to dinner, and tip the waiter, and so on. Every time that dollar moves along, it creates fresh economic activity. That's what we need most right now.

The folks at the Congressional Budget Office have even gone through the $787 billion stimulus package and estimated which parts of it provide the most efficient stimulus. According to their report, tax cuts and direct payments to individual have the lowest “multipliers” — some less than 1.0, which means those dollars won’t get past the original recipient. The biggest multipliers are direct spending on goods and services by the government and transfers to state and local government for infrastructure. But only $132 billion of the stimulus package was spent on those two categories, according to the CBO.

How much American currency is in circulation?
— David T. Clifton, Ariz.

On Wednesday, Mar. 25, there was just shy of $900 billion ($899,798,000,000) Federal Reserve notes (dollars) in circulation, according to the latest data from the Federal Reserve. That includes cash sitting in bank vaults, but most of it is out there making the rounds of the global economy.

That cash represents less than half of the $2.1 trillion in assets on the Fed’s books. The rest is largely debt securities, like U.S. Treasuries that the Fed swaps for cash when it wants to add or drain cash from the system.

The supply of paper money is about $100 billion higher than this time last year. But that's just the minimum monthly payment on the $2.6 trillion in consumer credit outstanding. These days, paper currency is only one form of money. The contraction of consumer wealth from lost retirement savings and falling home values is much bigger than the increase in supply of paper money.

And that's why, for now, the folks at the Fed say they're not too worried about stoking inflation with all these trillions of dollars in fresh lending and spending.