The Christmas Economic Stimulus

Keynesian economists argue that when the economy is not providing enough jobs, the problem is a lack of demand. If more consumers were clamoring for additional goods and services, businesses would hire workers to provide them. If borrowers are tapped out, either overloaded with debt or saving more because of uncertainty, they cannot increase spending.

Governments, however, can usually continue borrowing even if individuals cannot. When the economy is in recession, the government can run a deficit, and spend the money to pump up demand. Once demand is higher, businesses will hire more workers. With more money in their pockets, workers will spend more, creating even more demand. Once the consumer demand recovers, government can then drop the deficit spending, as aggregate demand will have recovered. Keynes likened it to priming a pump.

This is the economic theory behind the various government stimulus packages that we have seen in the last few years. President Obama’s job program proposal was another along these same lines. It did not get off the ground, due both to partisan politics and a legitimate concern that the Federal government is already carrying too much debt.

It occurs to me, however, that the private sector is about to undergo a burst of increased demand. It’s called the Christmas selling season.

Goods are moving from the warehouses onto store shelves in anticipation of Black Friday. Retailers are hiring additional staff to handle the expected surge in buyers. And the increase in demand is not just limited to presents. At my employer, we are already making deposits for the caterer and DJ at our annual Christmas party. Folks are booking airline flights as they plan their holiday travel.

Viewed as a temporary increase in demand, the holiday season fulfills the same function of a government stimulus package. But we all know what happens after the first of the year. Seasonal workers get laid off. The inevitable credit card bills arrive, causing December’s free spending consumers to retrench in January. Economic activity drops back down again as people tighten their belts.

So when the private sector does a stimulus package, the effects are short term in nature. I wonder why we think it will be longer lasting when the government does it?