How I Will Be Rich

              The biggest topic on most American’s minds these days is the state of the current economy. The economy is in very bad shape right now. The housing market is declining at a more rapid rate than it has in history. The unemployment rate is around seven percent, which is the worst it has been since the early nineteen-eighties. The stock market has not declined as rapidly as it has been over the last couple of years since the nineteen-seventies. Times are looking grim and people are socking away more and more money. Savings have increased over the last several years. People are pulling their money out of investments and holding on to it for fear of losing their nest egg. The largest concern over the declining economy is the rate at which the decline is taking place. The economy is in a nose dive and, at this pace; it is on course for depression levels.

            There are many theories and many facts about how the economy has reached the level that it is at. One major factor that there is very little dispute over is the mess that the banks caused through sub-prime lending. The banks lent money for the purchase of homes to borrowers who could not really afford to purchase homes. Banks offered low introductory rates and claimed that people could refinance before the rates adjusted. The housing market declined and refinancing became less and less of an option for people. When interest rates adjusted, hundreds of thousands of homeowners where left in situations where their mortgage was more than they could afford. This led to foreclosures and the lending banks taking loses on homes. Banks became less liquid and stricter on their lending policies. People found it harder to get loans on homes. The supply of homes went up while the demand went down.

            The decline of the housing market caused a ripple effect throughout the rest of the economy. Demand for homes where low and construction and home building declined. This caused many other industries, tied to the housing market to decline. The farther down the line the effects were felt, the more jobs were lost. People became nervous about the economy and consumer spending declined. This affected pretty much any other industry that was not directly tied to the housing market. Necessities became luxuries and people cut back. Businesses began to struggle and fears lead to people cashing out there investments, favoring cash to interest baring securities.

            The United States has a new face. A new president was elected by promises of change. He claimed he could turn the economy around and put the country back on track. The people elected him based on the hope of a brighter future and an end to the economic bleeding. He took over a country with a rapidly inclining unemployment rate and rapidly declining housing and stock markets.

            Within the first month of his presidency, Barack Obama pushed for and signed in to law The American Recovery and Reinvestment Act. The act was designed to address and redirect the economy in the right direction. The largest portion of the act is designed to give tax relief to most people. The act also puts more money towards unemployment benefits, healthcare, education and towards industries that are geared towards clean energy technology.

The most dominant portion of the act, consisting of two-hundred-thirty-seven-billion dollars, provides tax relief for individuals. Each worker will receive a four-hundred dollar credit on their taxes in 2009 and 2010. The floor was raised for the alternative minimum tax, allowing a larger portion of the population to be exempt from the tax. The child tax credit was expanded, giving a one-thousand dollar tax credit to more families. The college credit was expanded, giving a twenty-five-hundred dollar tax credit to students for tuition and college expenses. The first time homebuyer credit was expanded from seventy-five-hundred dollars to eight-thousand dollars and the repayment was repealed if the homeowner stays in the home for more than three years. The first twenty-four-hundred dollars that a person received in unemployment benefits are now excluded from taxation. Several tax cuts have been made for companies as well. The largest advantage is that companies can use current year losses to offset profits from the previous five years, allowing companies to actually receive tax returns.

Depending on who you ask, some people believe that the plan will turn the economy around and many believe that it will only make things worse. The major goal in this whole process is to leave people with more money in their pocket after tax season. With more money in their pockets, people will feel confident in spending again. People start spending, jobs start coming back, spending is increased even further and, once again, we have a domino effect and the economy starts cranking along again. This sounds great but the uncertainty comes with what the people intend to do with their money. If people receive these tax credits and these lesser tax burdens, are they going to sock the money away and refuse to spend it or are they going to turn around and infuse it back in to the economy by spending again? That is the big unknown at this point. The result will probably be mixed. Some will sit on their money and some will spend. The next question is whether or not the amount coming back to people is going to be enough. An extra four hundred dollars for a year is not very much for someone to really want to go out and make some big purchases. People are probably going to need a little more of a push to really feel comfortable spending again.

The portion of the new tax plan that will probably help to stimulate the economy is the changes made to the housing credit. The new plan gives first time homebuyers an eight thousand dollar credit on their tax return. Furthermore, this credit does not need to be paid back if the homeowner stays in the house for over three years. The old plan gave seventy-five-hundred dollars back to homeowners on their taxes and the credit actually had to be repaid, regardless of how long someone stayed in the house. This new program could stimulate the economy in two ways. First, it gives encouragement to people that have jobs and have money to go out and finally make a home purchase. With more people entering the housing market, demand can begin to rise and the housing market can start to recover. Homes can begin to appreciate again as supply declines and demand increases. Jobs surrounding the housing market will begin to recover as new home construction will increase again and people will purchase and remodel older homes. The second way that this plan could help to stimulate the economy is that it gives eight-thousand dollars back to the homeowners. This money seems like a much better sum to really encourage people to begin spending again. New homeowners can use their credit towards home remodeling or towards new appliances or electronic goods. The point is that eight-thousand dollars is enough money to get people to start spending and infusing money in to the economy.

The plan does not really do enough to benefit businesses. There are some points within the plan that will allow businesses to use current losses to offset gains made in previous years and credits to businesses who use renewable energy sources. The plan really does not do enough though. The economy is suffering from a rapidly increasing unemployment rate. Making larger efforts to help build businesses back up could do wonders for stimulating the economy. Businesses create jobs and the easier the government makes things for business owners, the more likely it is that businesses will succeed and jobs will be created. People are not spending money and the country’s businesses are feeling it. Companies are laying off large amounts of employees to stay in business and some businesses have not been so lucky. Some businesses have had to close. If the government did more to really help stimulate businesses, the economy would probably greatly feel the effects.

The plan to increase unemployment benefits really misses the mark as well. The plan allows for twenty-four-hundred dollars of unemployment benefits to be tax free. The plan also increases benefits by twenty-five dollars per week and extends the length of time that they can be received. This plan certainly makes unemployment seem more appealing. The idea behind the plan is good. Unemployment is rapidly increasing, if more people are unemployed, the government should make their lives easier. The problem is that the plan promotes staying unemployed. The plan extends the length of time and the amount of money received. It is almost as if the plan encourages people to stay home and not find jobs. If the amount of money being received is enough for an individual to live on, an individual may be compelled to stay unemployed as long as possible. This part of the plan does nothing to reduce the rate of unemployment.

Other than tax relief, the act makes many investments in various other industries. Almost eighty-seven-billion dollars of the bill is going towards funding Medicaid so the lower income individuals can have healthcare. Forty-five-billion dollars is going to school districts to prevent layoffs and cut backs. The funds can also be used towards school maintenance and repairs. Twenty-eight-billion dollars is going towards highway and bridge construction projects. Eight-billion dollars is going towards public rail transportation. A lot of the money will be divided up in to even more projects such as green energy projects, scientific research and development, complete broadband internet and helping fund various government agencies.

Most of the various projects that the money is going to be invested in will help ease unemployment issues. Money going towards schools will insure that teachers are not put out of work and that students receive the education that they need. All of the various other projects that are receiving funding require manpower. These projects are not only an investment in the particular project but they are investments in the labor force behind the projects. It is a way of getting more of the funding in to the American people’s hands. As mentioned before, if the unemployment is reduced, the spending will increase and the economy will begin its recovery.

The act does quite a bit in an attempt to reduce unemployment. It also has areas that may counteract that reduction. There is probably more good that is going to come from this act in the way of reducing unemployment than bad. As long as people want to constantly better themselves and their way of life, they will do whatever they have to in order to avoid unemployment.

One effect that has come from the sub-prime lending problem and from the credit crunch is that the stock market has taken a huge hit. People have had to deal with losing houses and losing jobs. To top it off, people are seeing their nest egg, invested in the stock market and various mutual funds, drop out as well. The new plan does not really address this. The plan offers minor tax relief to businesses and offers credits on personal taxes which might stimulate spending and help increase the bottom line of companies but it’s not enough for investors to really recover. 

One idea to motivate people to invest in the stock market again is remove the tax on capital gains. This could stimulate the economy by encouraging investors in to the market with no tax implications on their gains. This idea has been thrown around for a while and would probably only be a temporary tax relief but it could be a big benefit to get investors back in to the market. This will allow firms to raise working capital through the use of equity as opposed to debt. The overuse of debt is what got the economy in to its current mess. Give investors an incentive to want to invest, companies can rely on debt financing less and there will be a reduction in the cause that got our economy in the position that it is in today.

Overall the American Recovery and Reinvestment act has some great points and some flawed points. The plan also leaves out some vital points. Our economy relies heavily on the housing market. If the plan can begin to turn the housing market around, the wheels will start turning again on the rest of the economy. Unemployment should not be encouraged. However, the various projects that the plan is investing in should help to reduce the unemployment. The plan should do more to focus on boosting businesses and encouraging investors. If the businesses are thriving, there will be plenty of jobs to be had. If people have jobs, people will spend money. The economy is cyclical. If one facet of the economy starts working like it is supposed to, everything else begins to follow suit. It all comes down to getting people to spend more. Spend more money, businesses thrive, businesses create jobs, people with jobs spend more money.

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