How the Stimulus Works
I plan to get back to writing about aviation and other geeky things, I really do. However the economic situation keeps pulling my attention. (And the winds today forced me to cancel my IFR lesson again too.) I keep hearing things that make me rant at the radio or computer screen. My economics-related posts are my response.
The government’s spending almost $800 billion in the stimulus. It’s a massive giveaway. This will leave debt for our grandchildren’s children. It’s a way for Obama to socialize the country. This expands the government and government jobs aren’t like “real” jobs. This is the first step in taking over everything by the government. Obama will be setting salaries for everyone now. This is massive pork. The economy will just recover on its own.
We’ve all heard all of this and probably more. But most or all of this is from a small group of commentators who aren’t reporting news but using news as a way of pushing their point of view. (Have you noticed that most “news” shows these days are actually commentary shows?) If you follow their philosophy that’s up to you. But if you’re just curious about what another point of view is, this post is for you. I’ll try to base my information in economic fact.
The stimulus bill is just a bit less than 800 billion dollars. This is a phenomenal amount of money by anyone’s measure. The purpose of this bill is to temporarily fund government spending programs to build things or pay people (firemen, police, etc) that we would need to do in any case. It is to replace the spending that we might otherwise provide ourselves. The stimulus bill is separate from TARP, there’s been confusion on that. TARP is a bailout of the financial institutions, it is targeted. The stimulus bill is to stimulate the economy as a whole. We do that by spending money.
The problem is that the usual people who spend money in our economy - consumers and businesses - can’t do that or at least can’t do as much of it. Neither consumers or businesses can borrow money to make investments with, banks don’t want to loan even to successful businesses with cash reserves today. So business revenue has fallen and consumer income is down (in real terms); there’s just less money to spend. Government is the only possible source of spending right now.
Fortunately there are things that the government can reasonably spend money on and that we actually need to spend money on too. There are things that people use every day like roads, bridges, airports, school buildings, and more that need infrastructure improvements. These are common goods that help the economy in the long run. There is research that can profitably be done and that can help reduce the money we spend on oil. We can improve our energy sector and stimulate growth in new technologies. Done properly, this stimulus spending will increase our economy in the future and pay for itself in the long run.
If you’re curious about reality and not commentary (mine or otherwise) see recovery.gov. The full text of the bill is there, and the breakdown of the spending is there too. As the funds are spend the spending will be reported on that site too. Read it for yourself and make your own judgement based on reality of those words, not on commentary which is really just someone else’s opinion. While all people are created equal all opinions are not equal. Test ideas against reality.
The jobs that this stimulus will ultimately support will be jobs not on pork, but on necessary work. They’ll be real jobs in that people are paid real money and do real work. Some will fund current ongoing government programs, but a government employee still gets paid real money for real work too. Most funds will go to government contractors and outside vendors to design and build things - the government doesn’t have their own construction companies after all. Government pork are projects that are wasteful. But these are projects that we need.
No where in any statement by the President has he said anything about taking everything over. This, frankly, is a conceit by a few commentators. Or perhaps even a phobia they have. On the contrary, Obama keeps talking about supporting businesses and creating the conditions for new businesses to grow. Growth has to come from businesses, not the government. Everyone knows it and no one’s disputing it. But the government can setup the conditions for growth and business can’t - businesses simply don’t have the ability to influence the whole economy the same way.
The amount of the stimulus was set by using fairly straightforward prediction to see what the GDP would have been without the economic problems, then comparing that with the forecast with the economic problems. The difference is the shortfall in spending that the government will have to provide. The problem is that shortfall is about twice the size or more than the stimulus is. So this stimulus will probably not do the trick. We’d rather have too much than too little stimulus– it’s like crossing the desert with too little gas in your tank. Part of the problem is that it takes some time to pass a stimulus bill and get it into action. In that time, things continue to get worse. With a smaller stimulus it will take longer to recover.
The economy would just eventually recover on its own, that’s true. But that may be a decade or possibly more. It took Japan ten years to recover from a much smaller problem. The Great Depression lasted a decade despite massive federal spending. (But it was made worse by raising taxes and by uninformed fiscal policy.) The economy was only boosted out of that by even larger federal spending for WWII. In fact, it can be argued that the Depression helped cause WWII by promoting unrest, massive German inflation, and an unstable world-wide economy.
However long it takes for the economy to recover is time that is lost to people; time without healthcare funding (private or public), without income for education, with people unemployed and underemployed, and worse. A failed economy has a direct effect on health, longevity, well-being, and life or death. Yes, it’s worth intervening to try and fix things.