I'm utterly clueless about economics, but isn't the stimulus package really dumb?

Great Debates
1

I know next to nothing about things fiscal, so I could be really off base here. So feel free to correct and/or mock my ignorance. But isn’t the stimulus package really, really stupid?

One of the things I think I learned once is that if the Invisible Pink Unicorn waved her purple horn and gave everyone $1,000,000, absolutely nothing would change. Gas would go from $3/gallon to $60/gallon, bread from $2/loaf to $40/loaf, etc. Basically, inflation would hit like a mother, both income and expenses would scale appropriately, and everyone would be right back where they started. Correct?

If that’s so, how is cutting everyone a $600 check any different? Is it because only Americans are getting this check, and not the Chinese, the Germans, etc.? Is it because people who make over $75,000 aren’t getting the check? If that’s the case, isn’t $600 per person really a trivial drop in the bucket? (Except in the sense that $600/person times, I dunno, 150 million people, is billions of dollars, certainly no drop in any conceivable bucket.)

Help me out here. It seems that the economy is either in the shitter, or heading towards it, because of some unfortunate and complicated phenomena that I don’t really get, such as the subprime mortgage scandal, stagflation, etc. Isn’t cutting everyone a $600 check about the most indirect, least effective way to deal with these problems? Isn’t there still trouble in housing foreclosure land if I take my $600 and buy a PS3 or use it to pay down my credit card?

I just don’t get it, and that’s usually par for the course for all things economic, but I really don’t get it here. Help me out, in simple terms?

2

Well…yeah. It’s pretty dumb IMHO. Unless you are a politician. Then it’s brilliant. It doesn’t have to make economic sense if it makes good political sense. And it DOES make good political sense since most people will love those $600 checks (or the tax break if Bush gets his way). Bread and circuses and all that jazz.

Yes…what you are talking about here would devalue the currency (i.e. this is the classic ‘why doesn’t government just print more money and solve all our problems??’ Usually said over to many beers or in a college dorm after smoking a bit to much weed). I don’t think giving everyone a $600 check would have the same effect. It’s designed for a short term boost to moral I suppose. You see, our economic system is really a house of cards. It all hinges on that elusive quality called ‘confidence’. I suppose, besides the obvious political gain this would be one of the few actual gains. The theory being that if people are given money they will spend it…and spending it will renew confidence in the system in some mysterious magical way. And if THAT happens then the economy will straighten up and fly right. In theory…

(If that all did happen of course the short term loss of revenue would be quickly regained and the government could go back to wasting money on other, more important things.)

Yes…it is an indirect and IMHO ineffective way to ‘fix’ the problem. However, it’s a very popular way especially among those with a political agenda. Lowering the interest rates is probably a more effective means but it will take time before it’s effects are really felt. It’s that confidence thingy again.

BTW, I don’t think the economy is all THAT bad. I seriously doubt we are in for stagflation, another great depression or an alien invasion. Not this week at least. Part of the problem is the perception that things are Really Bad™. In theory giving people some short term relief will help that (somewhat).

Hope that helps and that it was at least semi-coherent. I may have had a touch to much to drink tonight so there is no telling…

-XT

3

The OP is off base: he might try taking a course in macroeconomics: it should cover counter-cyclical fiscal and monetary policy.

Cut everybody a check and the total demand for goods and services should rise.

During a recession, when there is surplus capacity and unemployment, producers respond by producing more output.

So why don’t we just keep cutting checks?

Well after a certain point, firms have difficulty creating more output. So they raise prices instead. Thus, we would have inflation. Under such circumstances a rise in taxes would be warranted, provided the proceeds are used to cut the budget deficit and not just increase government spending.

We are headed towards recession. So a little extra stimulus is probably a good thing.

That said, conservative politics dictate that the rebate checks be tilted against those most likely to spend the extra cash, that is lower income Americans. But that’s another topic.

4

As I indicated above, the stimulus plan wasn’t crafted with particular efficiency. Here’s a discussion of how it could have been better:
http://www.cbpp.org/1-24-08bud-stmt.htm

And this is why it may matter:
http://krugman.blogs.nytimes.com/2008/01/24/why-worry-about-a-poor-stimulus-plan/

Bruce Bartlett, the conservative economist and architect of the Kemp Roth tax cut of the 1970s- 1980s, is against the check mailing:
http://delong.typepad.com/sdj/2008/01/feel-good-econo.html
His points are valid. But he ignores the latest research, which makes his WSJ op-ed a work of hackery. See the comments section in the link above.

5

The problem with something like this is, that in your example, bread would go from 2 to 40 in the US, while in other places remains at 2; so anyone with two brain cells to rub together will buy the 2 dollar bread instead of the 40. Now your neighbour the baker is doing dumster diving for a living; and so the other local producers.

6

Expenses don’t always scale at the same rate that income does, though. Nobody’s going to spend more on their mortgage payments tomorrow just because they got 600 dollars in the mail today.

I think the stimulus package is meant to be a placebo, but placebos sometimes work, especially when dealing with economics. Stuff is worth what people think it’s worth, and money is worth whatever people think it’s worth. If everyone gets the idea that they have more money to spend, they’re more likely to help drive the consumer economy.

7

Like the OP, I’m also puzzled by the package. Getting a $600 check from the government just for existing seems bizarre. Don’t get me wrong, I won’t turn down the money, but my husband and I are doing okay financially–we’ve got jobs, health insurance, etc. We don’t need $1200 from the Feds.

It seems like Americans are receiving two contradictory sets of advice. For our own financial good, we should live within our means, sock away a healthy amount in our IRAs and savings, and avoid debt. But for the financial good of the nation, we’re supposed to spend, spend, SPEND. If my husband and I do get a stimulus check, it’s going straight into our money-market account, where it probably won’t be touched for a couple of years. Guess that makes us bad Americans.

8

As one who grew up in the depression the stimulus package makes no sense to me. If our economy depends on people spending money they do not have, and are morgaging their great grandchildren’s future it is a bad idea.

Even if one is a millionaire and he or she spends more than they take in they are going to get deeper and deeper in debt. A false economy is bad (and that is what we have with so many people so deeply in debt). I heard the average credit card debt is $10,000.00, pople have bought big houses they can not afford because they were allowed to buy them and if they figured it out they would never really own them but have the responsibility of the upkeep and high taxes that they wouldn’t have if they were renting. The cost of heating and cooling is higher in a big house as well, so should one (or both) of the bread winners lose their job or have an illiness they become homeless.

As for me, we didn’t have many luxeries, but we had security, and to me that means more than the most expensive car or bigger house.

If the people spend the money on things that will be said to help the economy it will help the businesses and the chinese but little will help those who are jobless.
The only way to get ahead(regardless of income) is to live below it. The prices of essentials have gone way up and the unnecessary things have gone down. It may be nice to have a big plasma TV,but when you lose your home there isn’t many places to hook one up under a bridge or in one’s car(If that is paid for) :).

Monavis

9

The government took way more than $600 from me last year. If they want to give some of it back I won’t complain.

10

Yes, it’s really dumb, as economist Don Boudreaux points out here

11

It’s all about confidence, and it’s nothing but a game. But at least it’s $600 of my money that isn’t being spent on Iraq.

12

A few years ago, I joked to my Mom that I’d proably be living under a bridge when I retired.

But she’d been hearing about our decaying infrastructure. So she told me that might not be a safe place to stay.

13

There is much truth there. Some of this is simply psychological. But the plan is relatively modest, and I don’t think it’s going to hurt. Whether it will help or not is debatable, but generally when the two parties agree on something, my experience is that you get the worst of both worlds.

Sadly, there is not much truth there.

14

It probably wont work but if they do nothing and it gets worse then they will be criticized. It is not much of an economic package but a good political one.

15

Amazing. Simply amazing. For the first time that I can recall, I agree with gonzomax. Perhaps I need to go back and examine my position on this issue.

16

Blind nuts and squirrels and all that jazz…

-XT

(in case this is thought an insult it was meant to riff off of the old adage 'even a blind squirrel finds a nut occasionally. I don’t wish to incur the wrath of the mods and also didn’t want folks thinking I was calling gonzo a ‘nut’)

17

OMFG, you actually know what you are talking about. That is exactly right, as long as the recession is the result of underutilization of productive capacity, demand stimulus is going to be useful to get us firing all pistons.

The other problem with cutting checks is that at some point we lose our ability to borrow.

The largest effect of recent tax cuts has been to transform tax revenue into T-bonds. We get the money either way and largely from the same people but with the current policies we have to pay it back.

There are several isues with leakage: a lot of the rebate dollars will end up in China and a lot of our T-bonds are ending up in foreign treasuries.

18

Yes but it is transferring money from Smith who won’t spend the money to Jones who will spend the money or it will transfer moeny from Smith who will have the money in 20 years to Jones who will have the money today.

19

Grow up.

20

The fact that both parties are supporting this sham should make people suspicious. It’s an election year and they’re mailing money to voters. The Dems like it because it shows that they care about the poor. The Repubs like it because it also hands out a lot of business tax breaks and increases the jumbo mortgage loan from $417K to $730K because, you know, the people looking for $730K houses are in real pain right now.

The money is an advance on peoples’ tax liabilities for the next year, so it may in fact be nothing more than an interest free loan for a year. Meanwhile the debt clock is showing that the US is a tad under $9.2 trillion in debt.

We’re in a big economic jam right now, caused by too much liquidity. The liquidity (or “availability of easy credit”) caused many in the financial industry and many prospective homeowners to make incredibly bad investments. So when they dropped interest rates last Tuesday (thus injecting more liquidity into the market), they basically just prolonged the agony and possibly guaranteed us a period of inflation as the dollar continues to fall against other currencies.

I’m saddened by the checks and by the interest rate drops; I’d hoped that last week would be the (painful) start of our recovery. Instead they’re just merging the whole mess in with the rest of the lies that both parties will be telling us leading up to the election.