Friday, January 25, 2008

Economic Stimulus?

President Bush and Congress have agreed to an economic stimulus package, and both are putting pressure on the Senate to act quickly to provide rebate checks.
Small Answers thinks that stimulus packages are, in general, good government, however, the 2008 it is too small and will arrive too late to stop the economy from going into recession.
This stimulus package is an improvement on the 2001 package which was seen by the author to be little more than a vehicle for huge tax cuts delivered to the very wealthy by the Bush administration.  This package delivers the vast majority of the government aid in such a way that it will reach working Americans, who are most likely to spend it quickly on American goods or services - the act which stimulates the economy.
Some conservatives deny that government can stimulate the economy at all, others simply think it is wildly inappropriate for government to do so.  The news media, however, widely agrees that the 2001 stimulus package worked, bringing us out of the recession caused by the uncertain 2000 presidential election and strengthened by 9/11.
Small answers thinks that CNN et al are incorrect in this assessment.  It was not the tax cut or the $300 rebate checks which brought us out of that recession, at least not by any Keynesian mechanism.  It was renewed, massive, and prolonged military spending coupled with an expectation that taxes for business would not go up for the duration of the Bush presidency.
The 2008 stimulus package will fail for the same reason that the 2001 stimulus package did.
Keynes assumed an effective savings rate around 30%, which was generally standard in industrialized nations in the 30s.  The US now has an effective average savings rate of around negative 1%.  As a result, when Americans receive windfall income, they use it to service debt or to shore up their very much lagging savings.
This does not create additional economic growth.  It is necessary to buy goods or services so that businesses will perceive heightened demand and hire laborers to increase production, in order to meet this demand.  Paying for the shoes you are already wearing does not increase demand for shoes.

Small Answers finds that the John Edwards plan, which calls for direct government investment in infrastructure projects - public works which require labor, would be far more effective at stimulating the economy, whether they were administered directly by the government or by contractors.  It would have the additional beneficial effect of improving infrastructure, a priority which some of us in Minneapolis feel has been neglected.

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