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Extra Money in Paychecks Means 'We' Can Be Stimulus

When Patrick Karchur's boss handed him his first paycheck of the year at Perfect Printing, just outside Philadelphia, he hadn't thought much about what he'll do with the extra cash in it.

Patrick Karchur paycheck
Patrick Karchur paycheck

"I'll probably spend it on my daughter," he figures. "Some how. Some way. You know how that goes."

The $858 billion tax plan approved by Congress in December included a surprise two percent reduction in payroll taxes for 2011, in what amounts to a $120 billion bet that Americans will spend the money and help juice the economy.

In short, after all the debate about the effectiveness of the Obama stimulus measures in 2009, now it's our turn. With more cash in our pockets, can we be the stimulus we need?

Payroll Tax Reduction Could Boost GDP

If you earn $100,000 or more, that temporary tax reduction will mean an extra $2,000 this year—that's roughly $40 more in your paycheck every week. It's hardly a fortune.

Yet, economists are estimating that by keeping more cash in our pockets—ready to spend— the tax package taken altogether could add between 0.5 percent to a full point to GDP growth this year.

When I queried folks on Twitter and asked friends what they think will happen with the money, the answers weren't too encouraging.

"I'm going to invest it in bonds," declared one of my neighbors.

On Twitter, @Chrisnnc wrote, "Every cent will go outside the U.S."

Another tweet fretted that the $120 billion is merely adding to our national debt.

Not to be a Polyanna, but I've got to believe that if lots of us spend that money, we're bound to have some kind of positive impact on the economy.

How To Be The Stimulus

I put the question to some of those economists who predicting GDP growth: What's the best way to BE the stimulus this year?

Spend it on services, which make up the biggest portion of the economy, Mark Zandi of Moody's Analytics told me. "Go out and get that landscaping that you've been putting off."

I don't have any need for landscaping, but I see what Zandi's getting at. What if I make time to get a weekly manicure? That's a service. And my newly manicured fingers would look great on a new tablet computer screen. Is buying one stimulative?

Retail spending is generally stimulative. But economics professor Peter Moriciof the University of Maryland's Smith School of Business says, "It's very important as where people spend the money."

"If they spend it at Wal-Mart," he argues, "on a coffee maker made in China, the multiplyer for that is less than one, because it doesn't roundtrip." And that won't add to jobs here.

"Spend your tax dollars on things made in America," suggests Constance Hunter of Aladdin Capital. Even eating dinner out once or twice a week counts, she says. "The value-added of that meal is right here in America, which helps increase jobs."

"The best way to be the stimulus is to buy a car," Nick Colas of ConvergEX told me. If not a car, then a new washing machine or so-called durable good that's produced in the U.S. "Manufacturing is one of those areas of the economy that has a big multiplying effect, in terms of the people it touches."

Saving as Stimulus

Miller Tabak economist Peter Bookvar finds all the exhortation to spend wrong-headed. He calls the payroll tax cut a steroid shot that will provide little more than a temporary boost.

"This country needs to save to pay down debt, not be encouraged to spend, spend, spend," he maintains. "That is the fuel for future growth."

Personally, I have been diligently saving for more than two years, now. I put off remodeling my bathroom after the 2008 market swoon, and now it really needs to get done. My extra payroll tax cash will likely pay for new tile, from my local tile store.

Finally embarking on the project, hiring a construction crew, makes me feel like I am economic stimulus. Of course, they haven't started demo yet. Remind me of that feeling, when my place is knee deep in cust and debris!

What are you going to do with the extra cash this year? How will you be the stimulus?

Contact Economy

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