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The Mass. tax rebate plan is a bad idea

Customers wait in line at a Kroger grocery store on July 15, 2022 in Houston, Texas. (Brandon Bell/Getty Images)
Customers wait in line at a Kroger grocery store on July 15, 2022 in Houston, Texas. (Brandon Bell/Getty Images)

To my fellow Bay Staters, awaiting Christmas-in-July tax rebates from those Santas otherwise known as the Massachusetts Legislature and governor: Please raise your hand with mine and swear that, if at all possible, you will save that check, not spend it.

It’s not possible for everyone, I know, but those who can bank their money, should. Why? Because, absent the economy’s implosion, which we’ll get to in a moment, spending the rebates could only worsen the 9.1% percent inflation for which they’re allegedly a balm.

I normally wouldn’t bite the hand that fed me $250 free and clear. Under the plan being considered, rebates would rain upon an estimated 2 million residents earning at least $38,000, maxing out at $100,000 for individuals and $150,000 for joint filers.

But while personal finance argues in favor of said plan — an earlier windfall, Uncle Sam’s COVID child checks, cushioned my credit union account and my economic security — the policy wisdom of Massachusetts’s rebates is another story.

Unless the economy falls into recession, helicopter-drops of money would approximate the effect on inflation that lighter fluid has on a flaming charcoal grill. More than half of these United States have cut taxes as bribes to voters — um, I mean a hedge against the cost of living. With so many jurisdictions mailing money out, their residents’ spending it all will goose prices even more. Washington Post economics columnist Catherine Rampell illuminated the dynamic in a recent smackdown of Massachusetts’s plan:

Inflation has lately reached 40-year highs because demand is strong while supply remains constrained. Consumers have a lot of cash on hand, thanks to both pandemic-forced savings (delayed vacations, fewer restaurant outings, etc.) and federal policies that pumped a lot of money into their pockets as well as the broader economy.

Meanwhile, global supply chains are still snarled and worker shortages persist across many sectors. Companies simply can’t ramp up production quickly enough to give consumers everything they want. So, the prices for the products that are available get bid higher.

To be clear, inflation’s brutal toll isn’t fiction, especially on the needy, and even after Massachusetts sent two rounds of federal pandemic checks to its working poor. Runaway prices also traumatize younger generations that have never experienced them before. Pacifying those voters with tax breaks would tempt even the most steely-willed politician.

Yet the discipline to save those rebates is self-mastery that is true power over inflation, as Taoism’s founder might have put it. Saving would not make a bad situation worse; the sad fact remains that only time will temper inflation’s bite. Unsnarling the supply chains can’t be conjured by magic wand.

[O]nly time will temper inflation’s bite. Unsnarling the supply chains can’t be conjured by magic wand.

While Rampell suggests a quicker, limited strategies — green-lighting more foreign competition and foreign workers to gin up competition, and gin down inflation — she acknowledges the guaranteed blowback from unions and jingoists. The Federal Reserve has engineered with zeal the most potent cure, higher interest rates. Those, alas, risk the backfire of a recession. Apropos of which, this Thursday will be a day to mark on the calendar.

On that day, we may be informed that we are unofficially in recession, if the government reports a second straight quarter of economic contraction. (The official recession referee, the National Bureau of Economic Research, disdains such loosey-goosey metrics and typically takes longer to make its call.) In a recession, spending is the prescribed medicine for a downturn.

The most recent data suggest consumers may be taking the Admiral Farragut approach to their money: damn the inflation, full spend ahead.

Meanwhile, multiple signs of falling prices, and the fact that securities markets are betting that that’s no mirage, suggest we may be poised to awake from our bad cost-of-living dream. But if inflation tempers, would that herald a sputtering economy, justifying rebates? Not necessarily. The most recent data suggest consumers may be taking the Admiral Farragut approach to their money: damn the inflation, full spend ahead.

Admittedly, this on-the-one-hand-on-the-other thinking confounds easy answers. But even Nobel laureates keep humble amid the conflicting signals.

We’re in a holding pattern, awaiting word whether to take the spend or save runway. Prudence dictates that rebate-fortified Bay Staters tweak another famous bit of advice, perhaps apocryphal, this one from their ancestors at Bunker Hill: Don’t spend until you see the whites of falling inflation’s eyes.

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Rich Barlow Cognoscenti contributor
Rich Barlow writes for BU Today, Boston University's news website.

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