Stimulus Package, Part I

There has been a great deal of coverage of the proposed economic stimulus package in the news for the last week or so. Today's news is that the bill that passed the House will not pass quickly through the Senate, largely because the esteemed Senators do not think there is enough being done. From my admittedly superficial research, it looks like the Senate wants to load on a whole bunch more giveaways onto the plan. This is because handing out $150 billion is not enough to satisfy the Solons of the Beltway.

If you're going to give a bunch of politicians a chance to hand out other people's money, you better be prepared to jump back quick to avoid getting trampled. Now, I don't want to seem as if I object to getting handed envelopes full of money. I love a windfall as much as the next guy, and my household's share of the swag would be about $1200. But frankly, I don't think this stimulus is going to work. To paraphrase Tennessee Ernie Ford: "You load $150 billion, and what do you get? Another day older and deeper in dept...I owe my soul to the Chinese government." After all, where do you think the money is going to come from?

The stimulus plan won't work for two reasons:
1. The current ecomomic malaise is being caused by structural problems in the financial services and banking industries, which in turn were triggered by the collapse of the housing bubble. Six hundrred dollars per person ain't going to reinflate the housing market. It is only enough to cover the increased mortgage payment on a subprime loan that resets this year. For a month. The next month, that home owner (sorry, that mortgagee; it's actually the bank that owns the home--poor bastards) will be unable to make the higher payment and then he starts to slide into default.

2. The other problem with the proposed stimulus is that since the US is already running a massive government deficit, another deficit piled on top of that will have little to no effect. For a Keynesian stimulus to work, the assumption is that government spending is in balance with revenue. The burst of deficit spending in a stimulus package jumpstarts economic activity, leading to a virtuous circle of economic growth. I'm going to say a little more about Keynesian theory in my next post.