To the Power of “Stimulus”
I love listening to NPR interviews with politicians, a one-stop shop for evasion, pandering, and euphemism. Yesterday the House Majority Leader, Democrat Stanley Hoyer, spoke on “All Things Considered” about the proposed $775 billion economic stimulus package (”stimulus” being the current euphemism for “spending”). He noted that many economists (and he made a special point of including “Republican economists”) thought that the stimulus should be even larger, up to $1.5 trillion. The interviewer asked if balancing the budget were a possibility and if that would help the economy as well. Hoyer said that we are “damned if we do, damned if we don’t” concerning debt since revenue is going to fall as tax receipts decline during this recession.
Hoyer’s “in for a penny, in for a pound” logic dictates that since debt is inevitable we shouldn’t concern ourselves about the size of the debt. If you’re in debt a trillion what’s another trillion or two among friends? I’m a layperson when it comes to economics, but Hoyer’s reasoning subverts common sense. If a friend needed to borrow money to pay his regular monthly bills I could be quite understanding and even supportive. But if my friend then borrowed additional money to remodel his kitchen, put in an inground pool, and purchase a newer car, I would begin to question his financial wisdom. “But I already have to go into debt,” my friend says. Hmmmm…
It appears that fiscal prudence is predicated upon the Big Lie idea: the bigger the proposed package, the less people question it and the more efficacious it must be. If $100 billion could boost the economy what would $1 trillion do?! I guess there’s also a dollop of Stalin, “One death is a tragedy; a million is a statistic.” I bet that people are more likely to complain about small local spending increases (of course accompanied by small local tax increases) than they are about mind-numbingly massive stimuli. The turgid scale of a federal stimulus (and the fact that the costs are neither felt immediately nor directly) defies comprehension and when accompanied by a deafening cacophony of expert opinion any opposition is overwhelmed.
Be careful about making a household budget analogous to a government budget. The US government in particular can do things that no household could ever do, like raising debt at very low rates, coercing people to give it money in the form of taxes, and even just printing money when it needs it. Nonetheless, your point is probably on target in the sense that people, especially foreigners, may stop financing the US government if it appears to be fiscally imprudent.
Most economists favor a stimulus and believe trying to balance the budget (especially by raising taxes) would be a bad idea at this point. Many economist also like big numbers, too. But what any economist will tell you is that to be effective, a stimulus package must be targeted, timely, and temporary. My hangup is that the bigger the package, the harder it is to satisfy any of these criteria.
I loved it! Bravo, young chap, bravo!
Jeff, perhaps you can shed some light on another issue that’s popped up during the discussion of the recession. In several articles, I’ve read that some economists are worried about the recent increase in the savings rate. For the last several years the savings rate was actually negative, but it has now risen to the highest levels in American since the 1930s. Apparently economists are afraid that people will take their money and stuff it into their mattresses like during the Great Depression, removing the money from the economy. I work as a bank teller and I’ve seen no sign of that; customers are more likely to buy CDs and invest in ordinary savings accounts than before, but they don’t appear to be mattress stuffing (I’m sure the fact that the FDIC has guaranteed all money in bank accounts until the end of 2009 has helped avoid runs on banks.). That being the case, the savings rate indicates people buying less, sure, but also that they are putting more money into bank accounts. Money in bank accounts remains part of the economy as banks lend it out. So wouldn’t that undermine the hullabaloo over rising savings rates?
Yes, this is one of those peculiar cases where an outcome that has been advocated for years occurs when no one wants it. Another example may be how the credit crisis has reduced income inequality by putting thousands of financial wizards out of jobs.
To answer your question, one must go back to the economic justification of a stimulus, which is to use government spending as a way of making up for dropping private spending. Right now, this drop in private spending has become the priority for policy, and that is why many economists are unhappy to see people putting money in banks instead of spending it. Saving does fund investment, but a factory won’t invest if there is no demand for its product.
The reason a drop in spending is worrisome is that it can lead to deflation, which can quickly spiral out of control as it did in the Great Depression. It’s counter-intuitive, but an environment of persistently falling prices is as bad as or even worse than runaway inflation.
There are some economists, however, who have not changed tack because of the recession. They adopt a more common-sense view that encouraging spending isn’t a solution to a recession caused by over-indebtedness.
I think the essential difference between these two viewpoints is that of a timeframe. The stimulus view is overwhelmingly concerned with averting a perceived immediate disaster, and the second view is more concerned with longer-term effects.
Anyway, here’s two dissenting views of the stimulus via NPR:
http://marketplace.publicradio.org/display/web/2009/01/05/pm_fiscal_stimulus/
http://www.npr.org/templates/story/story.php?storyId=99263137
Here’s the terser answer:
The Paradox of Thrift