Does It Really Stimulate?

It seems a bipartisan effort to ensure that there is some sort of stimulus bill, and only a few politicians think there should be no package at all.  Many economists have warned in the past, and continue to do so now, that stimulus packages like the one currently waiting final approval, do not work.  Let’s take a moment and examine the arguments as to why they don’t work.

1. Government money has to come from somewhere.

The government has three ways of getting money in order to spend on stimulus packages.  It can borrow money, either from the taxpayer or from foreigners; it can tax the taxpayers; or it can simply print more money.  If the government borrows money, it has to eventually pay it back, and with interest.  That means for every dollar spent now, in the long run, it means something like $1.50 paid back later.  This means that when the government spends money trying to stimulate the economy, it needs to make sure that the net results provide the government with more (probably in tax dollars) revenue in order to pay back the loans.  If GDP does not rise to accomodate that, then the government has effectively taken money away from its own programs, many of which exist to help the poor and needy.  That then necessitates borrowing more, taxing more, or printing more.

If the government taxes its people, that means less money for people to spend.  Now, arguably, the amount per person withdrawn in taxes won’t make a huge difference in how they spend their money.  Indeed, the taxes probably just dip, for the most part, into what people would spend on luxuries, as opposed to necessities.  The government, the argument goes, then could more wisely spend that money in areas where it is needed.  The downfall of this, however, is that all this does is shift the wealth around.  Instead of Business A receiving money, Business B receives money or unemployable Person C receives money.  Any jobs created on the receiving end are met with job loss on the taking end, unless Business A has extremely wasteful practices (grossly overproportioned bonuses and salaries, etc).  In order to balance the budget from losing customers, Business A either slashes salaries or lays people off, and while ripples of prosperity might spread from Business B, ripples of destitution will spread from Business A.  The question of how beneficial all this is in stimulating the economy rests on several crucial factors: if the luxuries forfeited on one end are more than balanced out on the other end; if the government is more efficient as moving money around; and if the recipients of the stimulus money need that money for expansion or if they need it pay off debts, remove toxic assets, or continue in bad business practices.

If the government simply prints more money, while it might have more to spend immediately, the influx of money not backed by any meaningful commodity will cause inflation.  Prices rise all around, until a balance is met.  That balance means that the nation as a whole cannot buy any more with the increased money in the system than they could prior to that increase. This ultimately fails to stimulate the economy, and quite often simply makes matters worse, as often incomes don’t rise to accommodate the inflated prices.

2. Spending on Infrastructure Has Mixed Results at Best

The idea behind spending on infrastructure is that first it creates more jobs to handle the construction.  As the construction workers take home their paychecks (which they didn’t have before), they can then take that money and spend on it other things they want or need.   The increase in spending means that various other businesses see an upsurge in customer demand, and thus can hire more employees.  The ripples are supposed to continue to spread to the point that the economy continues running on its own after that point.  In addition, good infrastructure is suppose to increase efficiency, which then decreases prices, which means people can buy more and employ more.

The problem with this notion rests mainly in whether its benefits have a lasting effect.  In general, work on repairing and maintaining highway and interstate roads is never ending, since roads do break down from continual use.  One of the concerns about the government giving money directly to create new jobs is that those jobs would disappear once the government funding runs out.  As those jobs disappear, spending decreases, which means other business cut labor to save cost, and pretty soon we’re back to the point we started.  Thus spending on infrastructure, and its continual need for maintainence, seems like a wise decision.

The problem with infrastructure, though, is that (unless we’re talking about toll roads) highways and interstates don’t directly create any revenue for the state.  Thus the state has to hope that, somehow, the increased efficiency will ultimately mean more tax dollars the state can harvest in order to continue working on infrastructure.  The stimulus money alone cannot keep providing.  If the state receives $1 billion to spend on salaries for construction workers, they can receive something like 10% back on income taxes (assuming the state even has income taxes), 6% on sales taxes (varying state by state), and varying percentages on property taxes and others.  Then the state can try to recover more from the  income tax on the new jobs created indirectly and the sales tax on what those people spend, and so on.  However, ultimately, the state cannot receive back the whole billion dollars, because some of it will be saved, some of it will go out of state, some of it will be spent on in non-taxable areas, and so on.  Eventually, all that stimulus money will run out.  It has to be supplemented by actual commodity increases in the private sector that are not directly dependent on accomodating the jobs directly created by the stimulus package.

In the past, what we have seen from any stimulus package at all is a brief uptick in the economy, followed by a short slump more or less back to where the economy was before, after factoring in normal economic growth apart from the stimulus.  Working on infrastructure might prove more beneficial than simply handing out $500 checks to every family, but there is general doubt as to whether any gains will provide a self-perpetuating cycle without any additional governmental influx.

3. The Stimulus Package Does Not Address the Real Problem

The real problem facing our economy is excessive debt and too little savings.  Personal debt is the difference between being able to handle onself in a crisis, or not.  A person without debt, and with the recommended cash reserves of one year’s worth of spending, will have very little to worry about when an economic crisis comes around.  Even if he loses his job, he can exist for a full year (and most people can find a new job in a year, even if the job isn’t a very good one) before his finances run out.  Moreover, he’s also in the position to help those around him who couldn’t–through no fault of their own–escape debt and accrue sufficient savings to help them through the crisis.  However, too many people live beyond their means, and when the economic downturn came, it hit them hard.

This lack of planning is one of the biggest perpetuating factors in our continual slump.  People with sufficient cash reserves can dip into them without too much worry, knowing that eventually the economy will improve.  Thus they can keep spending their money more or less as they had before.  That helps bolster businesses, and in turn keeps people employed.  People without those cash reserves have to drastically cut back on spending just to make it through, and many who struggle with their debts on top of their lack of savings find themselves unable to keep afloat.  Thus less money is spent, and businesses see fewer customers, and thus have to make cuts themselves in order to keep going.

Governmental debt is just as big a problem.  By taxing to cover the debt, the government removes money from the economy, at least temporarily.  The delay in putting that money back into the system has its costs, due to inefficiency by the government (paying all those government employees, for example), due to inflation, due to where the government focuses its spending.  By printing money to cover its debt, the government merely causes prices to rise all around, which further decreases spending.  By borrowing, the government not only causes inflation, but faces larger debts in the future, a devastating cycle.

In essence, debt was the fundamental cause of our current economic problem.  True, proper oversight and regulation would have probably curtailed most of that problem, but that does not change the fact that the core of the problem itself was excessive debt, both personal and governmental.  Thus, increasing our debt is not going to fix the problem.

4. Aid, Not Stimulus

This is not to say that the package itself (or some form thereof) shouldn’t be passed.  Handled wisely, the package could potentially help us weather the crisis.  There are many needy people that this package will help in the short run, and there is no denying that those people need the help.

However, the main problem with the package is not necessarily its contents (though those have been openly questioned and hotly debated), but how it is being marketed.  Read through, the bill is essentially a laundry list of wellfare proposals, geared more towards preserving jobs (especially governmental jobs) than in truly creating new jobs.  Moreover, given the doubt about its impact on the economy, it is perhaps not wisely entitled a stimulus package.

Only time will if the jobs it does create will stick around.  I’m skeptical, myself.  But at least we can take comfort that many people should be able to make it through the next year or two because of this bill.  By then, I predict that the economy should see something of a natural upturn (with or without the package), so maybe that’s all we really need to weather this current crisis.

I just hope that we take the advantage of this current cirsis to understand the dire need to be more fiscally responsible, both personally and on up.

2 Responses to Does It Really Stimulate?

  • Gerard E. says:

    The Porkapalooza Bill is a classic example of the foolishness in this phrase- Don’t Just Stand There Do Something. It represents everything that the Washington Elite in their heart of hearts have wanted to inflict on their fellow Americanos since well nigh 1933. All in one big lovavble pork-filled sausage casing. Do not think many of us in PA will forget seeing GOP Senator Arlen Specter snuggling up to Dingy Harry Reid in the announcement of Pork In Our Time. At same time- except for mania for infrastructure- don’t see how state and local governments will receive help from Porkapalooza. Philly Mayor Michael Nutter told his top managers to give him three cost-cutting scenarios each- bad, really bad, and Oh My (will not break 2nd Commandment on this blog.) Meaning- up to 30 per cent budget cuts across the board. Including a possible 2000 or more police officers turning in badges. PA Government may or may not be in dire straits- we may not know until the annual late-June early-July kerfuffles between Gov. Fast Eddie Rendell and wascally Wepublicans(according to PA MSM, of course.) Meanwhile I hope to promote cousin Edward for Sen. Specter’s seat- devout Catholic, ethical lawyer, doting father of 2-year-old Katie, makes me look like a flaming liberal. Until then, we shall hold and roll.

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