"If people would say to me, 'Would you rather recover or be stimulated?' I think I'd rather be stimulated." - Rep. Barney Frank, Department of the Treasury Office of Thrift Supervision National Housing, December 8, 2008.I've been thinking on this for a long time. Stimulating the economy in rough times clearly used to work. It worked somewhat in the Depression (although the tax cuts were quickly erased when Hoover tripled the tax rate to 63% in 1932) and it worked in the Reagan era, particularly in the 1982 recession. G.W. Bush has tried both direct checks and tax cuts and, with the exception on the cut in the tax on dividends and capital gains, they haven't done much. Let's look at this a little more.
Economist John Maynard Keynes proposed his approach to stimulating the economy by increasing demand through the injection of money at the "bottom". (called "Keynesian Economics" or "Keynesian Theory", in case you want to look smart at your next block party)
It seems that every politician of every stripe the world over accepts this theory, without paying much attention to the fact that it seems not to work. For people ambivalent to government spending at least, it seems like a sound idea. Why doesn't it work?
Here's my primary theory, and I'll follow that up with an alternate theory. Just in case.
In a factory economy, things were produced and consumed within the borders of a nation. Stimulating demand would give people money to buy those products, which translates into increased orders at the factories that provided employment.
In a post-industrial economy, where global tranportation systems and multinational trade agreements, more and more consumer products are imported. This means some of that stimulus money goes to "locals" - the guy at the TV store, the guy at the car dealership, etc.
This is a natural evolution of economies. I'm not arguing that we need to preserve the factory economy of old. But it does seem to indicate that pumping money into people's hands is just not going to have the intended effect. It simply create a double-speed money pump to move US wealth overseas. (by both selling bonds to get the money for the stimulus and from the money leaving the country)
Alternate theory
Most Americans live live's full of debt. You have people rolling in car loans and credit card debt into their mortgage refi - which means they are paying for the Taco Bell lunch from a couple months ago for 30 years! Insanity. So if they get a few extra dollars, they pay a bill with it. Paying old bills is better than NOT paying them, but it won't stimulate the economy. The extra money simply vaporizes immediately.
I agree with the second theory. I think the debt of individuals and households buffers the effect of the economic stimulus. It's a factor that seems to be overlooked a lot.
ReplyDeleteI read that the recent low gas prices have helped the American people more than any stimulus checks could dream of doing!
ReplyDeleteI would like to think people pay bills with the checks, (like we do) but in truth I know too many poeple who re-did their floor or bought new beds.....so I feel they probably do spend it, but what does that do for the economy? Everybody purchasing a one time goody of a thousand bucks doesn't do anything! How about real tax cuts- or better yet, a flat tax rate (tithing concept anyone?) so it is fair, and let us bring home a little more each paycheck and spend more week after week. Maybe then you'll see a trickle of purchases actually stimulate something.
Let me say, though, in general I don't believe in the idea of an American dole. It just makes people more desperate for the government's next moves of "saving the victims" of this country. Hey, here's an idea... how about we take care of ourselves?
Yes, funny how the evil oil speculators aren't so evil when the prices are going the other direction.
ReplyDeleteI would love a flat rate tax paid by EVERY adult. If they are on unemployment or welfare, increase it by enough to pay the tax. A big problem now is that almost 40% don't pay taxes at all and so they just don't care who is paying and how much.
Just like a business is better when its employees are shareholders, a country is better when we all have a stake in the outcome.
Just try being a politician and running on that platform though.
@ramsam: The other thing you mentioned, "re-did their floor...what does that do for the economy?", etc.
ReplyDeleteThat's exactly the weakness of this particular approach to Keynesian stimulus. Injecting money in a thin layer across the consumer level is just not focused or plain not enough to do anything measurable.
If I recall correctly, the stimulus plan in 2008 spread about $150 billion across something like 200 million people at about $750 each. The GDP of the US economy in 2007 was ~$14 TRILLION. The total of the stimulus payments then was about 7% of the GDP. Not much in percentage terms.
Now if you took that $150 billion and shot the works on 3000 Boeing 737s ($45m each), or bought 3.5 million new cars ($45,000 each), or bought everything Costco sold in 2007 ($64.5b in revenue) + everything Nordstrom sold in 2007 ($8.5b) + everything Amazon sold in 2007 ($13b) + a lot more...THEN you would have focused the stimulus enough to impact the economy. Except of course, it would all have been fake and the people they hired in January would have been fired by the end of the year.
Just like scattered drops of water can't put out a fire (at least very efficiently), 200 million little one-time checks can't stoke an economy that is based on individual supply and demand.
Note to Big Brother, that doesn't mean keep spending more, it means please STOP. You're only making it worse.