Retail Stimulus

In a letter sent to President-elect Barack Obama, the National Retail Federation (NRF) asked for three periods of sales tax-free shopping—to exclude alcohol and tobacco sales—lasting 10 days each in March, July and October 2009 to be added to Obama’s coming economic stimulus package. The trade group estimates that it would save consumers about $20 billion, or $175 per family. The goal, of course, would be to revive consumer confidence and spur spending.

Under NRF proposal, the federal government would use bailout money to reimburse the states for the lost tax revenue. State sales tax rates range from 2.9% to 7.25%, the group said. The five states without a sales tax—Alaska, Delaware, Montana, New Hampshire and Oregon—would also receive money.

The Case for and Against a Retail Stimulus Package

"Without swift, additional Congressional measures, the current economic weakness could worsen, creating a more rapid downward spiral—beyond what economists are predicting for 2009—in the years ahead," the NRF said. In the third quarter, spending by consumers fell 3.7%, the biggest drop in 25 years. The fourth quarter's results are expected to fall even more. What the NRF is really asking for is a short-term stimulus to get people back into the stores. Given the dismal holiday shopping season, that is hardly an unreasonable request but will it work?

The sad fact is that the culture of conspicuous consumption that has gone. Sad but true, people are not buying the way they did a year ago and that has hit the retail sector hard—every bit as hard as it hit the automotive sector and since consumer spending is the engine that drives all economies, that has folks scared. They are not buying because they read the news and their confidence in their own employment is shaken. They are not buying because they feel that they need it for basics like energy, food, house payments, school clothes and gas. By comparison, that 52” flat-screen can wait. They are not buying because if they are lucky enough to have work, they don’t see themselves getting a raise or bonus while they do expect to pay more for healthcare.

At what point does a 10-day break in sales tax ease any of these concerns? At what point does it put people back to work? At what point does a short-term solution bring lasting prosperity back to America?

A Lesson in History

We have been throwing money at the economy for a while now, hoping against hope that by dumping enough greenbacks down the hole, we will eventually fill it up. Treasury Secretary Paulson has promised to keep printing money until it works. A look at history will show this to be a frightening idea.

When confronted with their own economic woes, the Roman Empire in the Third Century hit upon much the same strategy. They recalled the silver and gold coins in circulation and they melted them down, added more base metals and then restruck the coins. Now, each coin had less precious metal and, in spite of what the Empire decreed as to their worth, the people knew better and that led to runaway inflation. In fact, it got so bad that the Empire refused to accept its own money for the payment of taxes, a final acknowledgement that the money was, after all, worthless. This led to Diocletian’s Edict of Maximum Prices, which was an early attempt at a state-controlled economy in that it set a maximum price for everything that could be bought or sold in the Roman Empire. If you charged more, you were executed—a far cry from the Federal Reserve nudging interest rates up and down. The Edict was a failure and Europe found itself essentially demonetarized until the Carolingians of the Eighth and Ninth Centuries.

So if throwing money at economic woes doesn’t work, what would? History also guides us, with many examples of entrepreneurs flourishing when the State stood back, or even took on an encouraging role, with sensible regulation to curb excess and criminality—something woefully lacking during the last twenty years. Venice, Hong Kong, Singapore, Tokyo, Istanbul, New York, Pittsburgh, Chicago are all examples of highly prosperous places that worked as long as people understood that the key to prosperity is not artificial stimulation or heavy-handed control, which we have all witnessed as being useless; but the freedom to work and innovate and compete.

The Bottom Line

There is one thing that occurs to me with all this tax money floating around, all these stimulus checks being sent to taxpayers, and this tax holiday proposal on the table. That one thing is this: If putting all this money into the economy is a good thing, if letting us off the hook for sales taxes is a good thing, if sending us our own tax money back is a good thing, then folks, we are paying too much in taxes in the first place and I think, if we want to stimulate our economy, that is the place to start.