Economic Stimulus Package - What’s the Point?
Posted in Econ, Politics by George
One of my former professors sounds off on the new economic stimulus package:
Such stimulus, however, is futile. Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created.
If it comes from taxes, the value of Jones’s stimulus check is offset by the greater taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed – whether from foreigners or fellow Americans – for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government.
It makes sense. If $300 appears in the hands of every person in the United States, it’s not as if we now have more purchasing power as a whole. The total stock of dollars in circulation can always buy the same amount of goods, no matter how many dollars are in circulation…
January 28th, 2008 at 8:38 pm
Sounds interesting. What do you think about government social programs that put money in the hands of the most impoverished people in our country? Or a stimulus package that puts money, which could be made by taxes targeted at wealthier citizens, in poor peoples’ hands. I’ve heard that statistically poor people are much more likely to spend money when it’s put into their hands.
February 6th, 2008 at 3:27 pm
This stimulus package is going to come from borrowed money. It isn’t money that has been taxed.
If the money does go to those with a high propensity to consume, it will cause an increase in consumer spending for a short period. Consumer spending is responsible for around 70% of gdp.
Monetary and fiscal policy used together to stimulate the economy will probably have an effect. The fed just the federal funds rate in a major way and started the ease of the money supply back in mid-August when it cut the discount rate. They are also having auctions to allow banks access to money at cheaper rates. There is no one magic bullet.
The problem is that this administration has increased the debt a ton during good economic growth. Ideally you want the govt to spend more money in down times and have a more balanced budget during good economic times. With the amount of debt we have and issues checks out today of more loaned money we could face higher interest rates down the line due to the large amount of debt we are taking on. And has anyone seen the budget for this year? I have only briefly looked at it but it will increase our debt a ton.