Can You Stimulate Me Economically?

Barack Obama, Economic Policy, Economic Stimulus, Economy, Infrastructure, Obama, Politics, President Obama, Public Policy
Adam    

I heard a crazy thing the other day; things are not going in the right direction for our economy. Actually, I think I heard that a couple of years ago. You remember those days don’t you? There was a housing bubble still, sub-prime mortgages were parts of conversations, and the positions on the wars in Iraq and Afghanistan would decide the next U.S. President.

Today, we have a President-Elect whose stance on the wars most likely did not help him get elected.  The call for change of the way things have been going brought him to victory. Now, what change is going to take place is a couple of months away from being realized. One issue that is absolutely necessary is an economic stimulus package to go into effect as soon as possible.

The potential second economic stimulus package has been in the news for a couple of months now.  There are opinions flowing at both ends of the discussion. That being stated, I thought it was important for me to throw my thoughts out there.

First, checks being handed out to citizens should not happen again. That was like my cup of coffee at 1:00 pm after a late night…I’m still going to crash.

Second, Federal spending on infrastructure is necessary and has always been necessary. Its not spending for the sake of giving money back to the poor. Its an investment in the future.  I racked up a lot of student loans, which was an investment in my future prosperity. I didn’t go out and buy a bunch of stuff with credit, which I would say is not an investment.

These two scenarios are the way I see the two sides of the argument over the economic stimulus.

The current number most commonly being suggested is $150-$200 billion in economic stimulus. This should go heavily towards infrastructure investment. Liberals and conservatives are calling for this type of Federal spending. But why so little?

The United States’ GDP for 2009 is projected to be at $15 trillion. The package being talked about would only amount to roughly 1% of GDP. This past week China unveiled an economic stimulus package in the amount of $586 billion, 16% of their GDP. 

Some economists (liberal) are calling for more spending to make up the gap in output. Paul Krugman thinks the stimulus package should be 4% of GDP, or $600 billion. Similarly, Robert Reich states “government may have to spend $600 or $700 billion next year to reverse the downward cycle we’re in.

Now, to assuage any fears that the federal government is going to throw money at anyone who asks for it, there are actual needs for funds. The American Society of Civil Engineers puts the needed expenditures over the next 5 years to bring the nation’s infrastructure up to good condition at $1.6 trillion. This number is what is needed for “improvements”. What about the new investments that are needed for the world economic leader to continue to grow throughout the 21st Century?

We need infrastructure improvements, we need new infrastructure investment, we need economic stimulus, and we need jobs. All of these needs can be met with a strong economic stimulus package. The money needs to be spent at some point, so why not have the government spend that money when everyone else is hoarding their own money?

 

 

Robert

There is one basic flaw in your plan, Adam:  America is broke and it is time to start acting like it.  No one is talking about where this $200 billion dollars is going to come from.  “Oh, just skim it off the top of the GDP.”  It is important to realize that that money is going to have to come from somewhere and it will not be from the Defense budget (sorry, liberals!)  Who is going to fork it over?

The bottom line is that the last thing we need right now is for the government to meddle with the free market.  Their manipulating is what got us into this problem in the first place.  Though I may have slept through most of my economics courses, I know that basic supply and demand is the ultimate balancer of prices.  All that the government’s proposed stimulus package is going to do is continue to artificially inflate the economy.  Well, my friend Peter Schiff* and I have a better idea: bleed the pig.  It is time for us to let things get bad.  The economy is absolutely decimated and the only way that it is going to get better is if we let things occur naturally.  Save some money.  Tighten our belts.  Why is everyone looking at this like it is a bad thing?  It is a chance for America to get out the filth that has been poisoning the economy for so long.  We have got to go back to the fundamentals of our founding fathers: hard work, dedication, and savings.  This is how we are going to save the United States of America. 

The last thing we need right now is for the government to pump a bunch of cash into America’s infrastructure.  You do not buy new shoes right after you lose your job; You make do with the shoes you have until you are in a comfortable enough position to get a new pair or until your old pair is completely destroyed.  Same goes for the infrastructure.  Let the market dictate when the roads are improved, not the government.  There is no overnight fix and until the government is willing to stand aside and let nature run its course, Americans are going to continue to suffer. 

 

*Disclaimer: I am in no way an acquaintance of Peter Schiff.  He is the ultra successful CEO of Euro Pacific Capital, as well as a best-selling author and I am writing for a blog that even my mom won’t read.

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9 Comments

  1. Andrew (Who am I?)  •  Nov 14, 2008 @7:20 pm


    Yea, stimulus package number 1 was certainly a duct tape / feel good solution. It was too simple, transparent and not thought-out enough to have any sort of positive effect on the bottom-line.

    Boy, it sure felt nice to not feel guilty about going out for a movie and dinner that weekend though.

    Any statistics out there on what people REALLY did with that money?

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  2. Jesse (Who am I?)  •  Nov 17, 2008 @2:26 pm


    I will look into the statistics from previous stimulus packages, but a lot of that money went to pay bills for stuff people previously bought with money they did not have. So, when they got the stimulus checks, they weren’t buying new stuff…they were paying for old stuff they couldn’t afford in the first place. I think a new stimulus check will enable them to pay off the rest of the bill that the first stimulus check couldn’t cover.

    But, it’s not just the average U.S. citizen that exhibits this problem. Look at Circuit City. Sure, it’s an easy target to talk about, but Circuit City doubled the number of stores they had in just a year or two back in 2005. DOUBLED their stores. Did demand for Circuit City stores double? No. But, there was more than enough cash available to fund the development of these additional stores. Did they build too quickly? Damn straight, but if the money keeps coming, why stop?

    But why even stop at Circuit City? Take any large American company and look at the pattern of spending and borrowing for the last few years. None of it was sustainable. The current collapse was well-deserved and the writing has been on the wall for years, but no one really saw it until sub-prime mortgages pointed it out. After that, everyone started pointing. And, most of the pointing, including my own, is pointing backwards trying to figure out where it all went wrong.

    Now, it’s time to figure out how to make it all right, which no one really knows how to do, but the plan is to throw more money with minimal qualifications at the problem. This approach is similar to throwing gasoline on a fire. And this is important, because with 1.2 million jobs gone so far this year, hopefully the fire will keep people warm standing in line for unemployment benefits.

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  3. Adam.BTA  •  Nov 17, 2008 @5:00 pm


    I can understand there is the rationale that government intervention got us here, so lets leave government out for the rest of the way…But, I don’t exactly think that is solution based mentality. We do need to look back and understand what went wrong, but we shouldn’t assume the free market would never have brought us down this current road.

    Jacob Weisberg made a good point to the ideology most promoted by Libertarians:

    “Their heroic view of capitalism makes it difficult for them to accept that markets can be irrational, misunderstand risk and misallocate resources—or that financial systems without vigorous government oversight constitute a recipe for disaster.” http://www.newsweek.com/id/164502

    So in that line of thinking, I do feel that part of the discussion does not move things forward for our economy.

    The idea behind spending on infrastructure is that the government is not just throwing money out into the wind. They are spending on tangible goods and services when the market is not.

    It is definitely a stressful time, but I think there needs to be action taken to cut off the flood of unemployment that is likely to come on for the next several years. This can be done not by stimulus checks or further investment into the financial sector, but by creating jobs by investing in the infrastructure that will be needed for the future development of our economy.

  4. Adam.BTA  •  Nov 17, 2008 @5:06 pm


    Robert, you are completely right… when it comes to buying shoes. You don’t go out and buy shoes in a recession, you go out and take the GMAT and go to Business School.

    “Applications to business schools are booming as record numbers of people seek to weather the current global economic turmoil by arming themselves with an MBA or similar qualification, according to a new global survey.”
    http://www.cnn.com/2008/BUSINESS/08/28/execed.applications/index.html

    There is good debt and bad debt for our country. Infrastructure is an investment in this country’s future, just like that MBA is an investment for the individual.

  5. Robert.BTA (Who am I?)  •  Nov 18, 2008 @10:20 am


    Call me old school, but there is no such thing as “good debt.” Any time you take on debt, you are taking a risk. Hopefully, the probability of finding a job works in your favor. I can’t find the link to the article, but it talks about how the average American graduate can only realistically pay back $45K over the course of their lives. Here is your other option:
    http://money.cnn.com/2008/10/23/pf/college/student_loan_fugitives/index.htm?postversion=2008102407

    A friend of mine is actually in his first year of B school and I was just chatting with him about his prospects. He said that normally, the top grads to into I-banking, private equity, hedge funds and consulting. Now that the first three categories are almost non-existent, that means that his entire class is trying to go into consulting. He might end up having to take some second rate consulting job and he’ll have $200K in loans to pay back. I’d say that is sobering.

    Oh, and it seems like by “an investment in this country’s future,” you mean “create an artificial market for services that will artificially inflate demand, synthetically driving up prices and wasting resources given the bloated government bureaucracy’s modus operandi”

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  6. Adam.BTA  •  Nov 18, 2008 @1:22 pm


    I don’t think you can say you are creating an “artificial market” for services that should be provided (i.e. water systems that allow you to drink clean water, sewage systems that allow you to not walk through sewage in the street, transit systems that take you to and from work, transportation networks that allow our economy to function).

    “synthetically driving up prices” is not what I would call any kind of increase in demand for services during financial crisis that has brought us (most likely, but still to be completely determined) into a recession. So, to state prices would be driven up implies inflation. But what if prices go back to pre-recession levels in the short-term? This is not meant to be long-term economic welfare. Its spending in the short term while markets balance out in the long term.

    Just for fun, check out in regards to inflation…
    http://krugman.blogs.nytimes.com/2008/11/15/macro-policy-in-a-liquidity-trap-wonkish/

  7. Jesse (Who am I?)  •  Nov 18, 2008 @3:02 pm


    Perhaps more importantly, look at the countries and companies that are putting the most money into U.S. infrastructure. Most of the companies are not American. We do not own many of our own toll roads. Do not consider this information as some type of xenophobic rant, but rather as a hint that other countries see investing in our infrastructure as a solid, stable bet with minimal volatility. While they were investing in our infrastructure, we were investing in subprime mortgages. Different levels of risk lead to different levels of yield, obviously. So, while we were plugging all of our money into condos, they were plugging all of their money into the roads that lead to these condos. Now, we have vacant condos, but people still use the roads, mainly to flee creditors.

    More importantly, the issue affecting the current economy is the fault of no single source. It is more of an epidemic without any cure, and the bailout discussion could be either a cure for some, but a placebo for others. The issue is not determining where the disease started, but figuring out how to ensure that no additional people get it, and then eventually finding a cure.

    Really, we just need more cowbell and everything will be fine.

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  8. Robert.BTA (Who am I?)  •  Nov 18, 2008 @3:05 pm


    Unfortunately, the markets cannot balance out naturally with continued government intervention. I guess it goes back to my “new shoes when you’ve just lost your job” point.
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  9. Adam.BTA  •  Nov 18, 2008 @4:59 pm


    Conservative economist Martin Feldstein http://en.wikipedia.org/wiki/Martin_Feldstein

    Here is his take on economic stimulus.
    http://zi.ma/68a16c

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