Econ 101: Stimulus

Momocrat Julie wrote a post earlier today, indignant over a member of the "Stimulati's" unfortunate characterization of the goals of the stimulus as spurring government spending instead of putting more dollars into the individual's hands "because...wait for it...we wouldn't spend it. Instead? We'd live on it."

We find ourselves in a precarious economic situation, and unfortunately, due to the bumbling idiocy that is Washington D.C., and the apparent impossibility of doing things in any way except the same old way, we are about to see our government take on a massive amount of debt in an attempt to "stimulate" ourselves out of this recession.

Now don't get me wrong.  Like Robert Reich, I'm dead-set against the Republican suggestion of all tax cuts all the time.  Tax cuts have their place, but it's hard to understand how anyone can justify tax cuts when we've had eight years of exuberant tax cutting which have gotten us to this very place.

On the other hand, we're clearly not in an era of post-partisanship when the ruling party (yes, Dems, I'm talking about you) takes a policy disagreement and turns it into a taunt, running as far in the other direction as possible, thumbing their noses all the while.

The stimulus bill that passed the House last week was massive, and an abomination.  My conservative twitter friend, Jr. Deputy Accountant, did the legwork for us and posted a two part series that very snarkily lists the various items that will be funded by the stimulus (Part I) (Part II).  Needless to say, there are quite a few items on the list that have me scratching my head in curiosity.  Stimulus, you say?

In my opinion, a stimulus plan should look like this: the government need to fund unemployment benefits and it needs to figure out some way to give some amount of health care benefits to the unemployed.  This is, bar none, our highest priority.  I know there are many in this country that are inherently against the idea of any kind of handout, and want Americans to rely on their own hard work and ingenuity.  Well, for those folks, all I can say is, at least with respect to this recession, the time for that exercise has come and gone.  Americans ran a sub-0 savings rate for years (now, suddenly, exponentially improved) and many of those facing unemployment are very literally without an option.  They've lost their jobs, and their homes.  They have negative net worth.  And in an environment where jobs are on net being destroyed, a "bootstrap" mentality simply won't cut it.  It makes no sense, for the long term health of our country, to have a visible percentage of our population destitute, or worse, dying because of poverty. 

Then, government needs to create jobs, to the best of its ability.  And it makes sense for the government to be involved here.  One of the reason that companies, even profitable ones, have to cut jobs right now is because of uncertainty.  Noone, and I mean noone, has a good grasp of exactly how long the economy will be soft.  The free market dictates that in these situations, the smart company must be as lean as it possibly can so that it can survive.  The government, however, is motivated by certain other risk metrics.  Although the government also has to worry about its (tax) income, it must deal with the greater risk of social and political instability (which can lead, though it may seem hard to believe, to overthrown governments).  Higher unemployment, more income disparity, more poverty all lead to greater social and political instability.

The stimulus does fund some amount of job creation.  However, the way the stimulus bill is written, there is hardly any transparency as to exactly how, or if, those jobs will actually be created.  This worries me. 

Certain line items, like those geared for transportation, energy and education infrastructure projects, will fund a combination of raw materials and new jobs.  Done properly, these can be the WPA and CCC of this recession.  However, there are also broad grants of money to research institutes, and regulatory agencies, broadband extention, digital TV conversion... all of which seem to have very tenuous connections to job creation in my mind.  These items belong in the standard federal government budget, and not in the stimulus plan, added like so many layers of salty bacon to make the package more delectable (and budget breaking).

All stimuli (?) is not created equal.

But back to Julie's indignation.  Why not tax breaks, tax refunds... why not stimulus checks?  I've discussed part of the reason above.  Right now, the self-interested individual and corporation, if they have the ability, should be saving every penny they can lay their hands on. Now, if you are an economist, you might say that savings is merely investment, since most of us continue to hold our money in bank accounts (though the mattress, or more specifically, gold, looks more tempting by the hour), which are suppose to be "invested" by banks in projects that generate some amount of returns.  However, given the precarious situation facing the financial system and the broader economic conditions, we hear that many banks are not, in fact, lending.  And because the federal funds rate, which impacts the interests we are given by the banks, are achingly small, banks are, in fact, able to continue to operate with only marginal lending. 

It's all about risk.  And the world is too risky right now.

Julie's point is still correct.  Too many families are finding themselves without the ability to save.  For these families, a stimulus check would be spent.  To raise our children, to pay the mortgage, to live.  But collectively, the rational behavior is still to save.  And that is why, ironically, the government has to do the irrational thing and spend.

Kady blogs ironically at Wonkess

Comments

[mai]

This was a good read. Very insightful!

[Julie Pippert]

As always, Kady, I love it when you get into this.

I think I unintentionally implied a support of tax cuts, refunds, or stimulus checks for the people. I don't believe in tax cuts *as they have been done the last eight years.* (Although I do believe in tax reform. Shhhhh) I don't have the solution.

My point, mainly was (simply) that the support of the stimulus to corporations because they'll spend it versus people who won't was erroneous. Predicating the stimulus package on the idea that it's better to give to the corporations than to the people as per the info in my post from Reich was dedonculous to me.

A sec ago I said I don't have the solution, but maybe you do. Your stimulus plan is about what I think it should look like.

After the red rage of yesterday cleared and after reading this...I see that fundamentally what i really oppose is the notion of ALWAYS aiming stimulus at the top! Whether it's tax breaks for the rich or stimulus funds to banks----it's all working off the idea of trickle down! Noooooo!

That (and this post) have helped me see that what I support is growing the grassroots.

Any tall tower of blocks, unless the base support is wide enough and strong enough, will eventually collapse under the top heavy weight of itself.

Again, with the caveat that I'm no trained economist, but it seems to me that perhaps? Our economy has hit that Tipping Point.

I know economists have wondered about this for ages. I know some have theorized that we've hit it. I'm thinking they might have a point.

Invest in the base somehow. Banks aren't giving construction loans. Small business loans, etc. It's not trickling down.

So...Stimulati (love that term!) should read this, and listen to people like you, and maybe even people like me.

[Junior]

We may not agree on *everything* (that's the fun part, after all) but I'm glad I'm not the only one scratching my head.

Thanks for the shout-out and any time you need me to do a little legwork for the greater good of America you know I'm down. :)

Even though we play for different teams, I gotta say the Momocrats are on top of their game as always. Keep up the great work and wonderful post, Kady! You're so the bomb!