Economic Stimulus Act of 2008

Economic Stimulus Act of 2008 was signed into law in early last year in order to help stimulate the economy. The intent of the act was to stimulate the economy, which was beginning to show indications of heading towards recession as the subprime crisis was emerging. The Act, worth an estimated $152 billion, comprised a multitude of measures. The Act provided funds for both individuals and businesses. The individual benefit was based around a flat rate of $600 and there was a child benefit as well.

Businesses received a wider range of benefits. One was a special 50% depreciation allowance. Another was a resetting of limits of depreciation of business vehicles. There was also an expansion of the limits on Section 179 expensing. This pertains to the types and categories of business purchases that do not need to be depreciated, but can be expensed in the first year.

The intent of this Act is to put more money into the economy. On the individual side, the stimulus has a direct effect. Regardless of taxation status, the money was dispersed to qualified individuals. The money was intended then to be used towards whatever means the individual desired, but the idea was to generate more consumer demand. One trait of pending recessions is that savings rates increase, which reduces consumer demand. This effect can than spiral, so the stimulus was intended to offset the impact of the increase in savings rates.

With respect to businesses, the impacts are felt on the taxation side. Depreciation is a non-cash expense that serves to lower a company's taxable income. Thus the company pays fewer taxes, keeping more of its cash. The intent is that this cash will then be reinvested back into the business, again providing a degree of stimulus in the economy.

There is some question as to whether this bill counts as fiscal policy. Fiscal policy is defined as a government spending policy that influences macroeconomic conditions (Investopedia, 2009). The business side of the Stimulus Act is essentially a tax policy in disguise, because the net effect of the stimulus is a reduction in taxes paid. However, the tax rate is not specifically addressed.

On the individual side, the stimulus is strictly microeconomic in nature and is not policy related. It is essentially a cash handout. Thus, on the whole the bill cannot genuinely be considered a component of fiscal policy. Rather, it is a one-time cash giveaway.

There is a potential multiplier effect of this legislation, but that effect is likely overestimated by the government. In principle, this influx of cash into the economy will lead to increased consumer demand and increased corporate spending. However, declining consumer confidence means that much of the stimulus money went into savings.