Forex

Few issues have brought Republicans and Democrats together like the economic stimulus package that was pushed through the U.S. Congress with breakneck speed in early 2008. When the Chairman of the Federal Reserve Board, Benjamin Bernanke, suggested action, Bush proposed and Congress passed a bill in an effort to jolt the economy out of a period of slow growth and housing recession. One of its main purposes was to provide tax rebates to lower- and middle-income people. But how can a small windfall in your pocket jump-start the economy and prevent a country from falling into a recession?
If you've read How Recessions Work, you know that recessions often aren't diagnosed until they are well under way. So, as soon as economists start to worry, lawmakers hasten to prevent one from occurring. Just as the 2001 tax rebates seemed to help dull an impending recession, Congress is hoping they will help again in 2008.

Members of Congress want the tax rebates to prompt people to buy more goods and services and thus knock the economy back on track. If enough people quickly spend their bonus cash, it will send a boost of demand into the economy, which should then encourage companies to increase supply and create more jobs. If all works according to plan, more jobs will lead to more spending and thereby keep the economy from slipping into a recession.

The theory behind reinvigorating capitalist economies with tax rebates is a lot like the idea of overcoming static friction, which you might remember from high school physics. When economic growth is stopped, it needs a large force to get it started, which the tax rebates theoretically provide. From then on, the hope is that all it will need are free-market forces to keep it going.