The Economic Stimulus Package

Some people have begun receiving their checks for the most recent attempt from our policy makers to curtail the recession, which interestingly hasn't begun yet (real GDP increased .6% in the last quarter). The first thing I want to mention is that this money is of course not free. It is not manna from heaven. I say this obvious fact to emphasize that anytime the government gives a tax cut it has four options: 1) cut spending, 2) raise taxes, 3) print money, or 4) borrow from lenders.

1. There have been no decreases in spending associated with the rebate.
2. There have been no increases in taxes associated with the rebate.
3. I am optimistic that we are not so foolish as to simply print extra money.
4. By default, the current plan is simply to add this new rebate to our current deficit.

Since the federal government plans on borrowing even more money, I think it’s important to discuss the repercussions of such an action. When a governmental body borrows large sums of money, it takes a portion of the borrowable money in the world. Instead of money being invested in Google or IBM, lenders invest in the United States government. This is called the crowding out effect. To put it bluntly, you cannot consume more today without hindering investment, thereby hurting consumption in the future.

The main thing to take away from this is you cannot "stimulate" spending without diminishing saving. Any money the government gives out to help the economy, must first be taken out of the economy. The idea that you can trick people into thinking they are richer so they will spend more now will not work, and may actually be harmful. If anything, this will encourage Americans to spend more and save less, which is how we got here in the first place. Many Americans are burdened by this momentary and minimal hardship because they didn’t plan for the future. Basically, the government cannot rescue us in the short-run; instead it should focus on long-run essentials (lower taxes, less regulation, less distortion of the market).

So how can we solve this problem? The short and simple answer is we can’t. When consumers over invest in some area, in this case houses, and businesses incorrectly assesses risk, in this case homeowners, then there will be consequences. But it’s not all gloom and doom. Remember, in real terms, adjusting for inflation, the average American is nine times richer than they were in 1840. This wealth is not a result of government intervention but is instead a result of the only real way to get rich, innovation. The average worker is richer because they are more productive.

Another problem that this package is supposed to help is unemployment. Which may I add is at a historic and geographic low. The reality is that this will probably hold back those who are unemployed and would be getting jobs. Giving someone an unexpected $1000 will be an encouragement not to work. As a result, this may actually prolong any recession we may have.

So how should we react to this stimulus package? What we should do with our package is simple: what ever we want! The money is ours and we should spend it like it is. You want to buy a stereo, buy a stereo. You want to invest in Dell, invest in Dell. You want to put it in your kid’s college fund, then for their sake do it. And please ignore the proposals that we all “Buy American.” We do no one a favor by supporting inefficient American businesses that cannot compete in the international market. And finally, what should my government do? Feel free to give my money back to me anytime, just cut spending along with it so you don’t have to tax my children.