Sunday, February 10, 2008

Economic stimulus plan

I decided for my first blog to discuss the economic stimulus plan. The bill will issue out about $150 billion in tax rebates for middle-class Americans earning less than $75,000 or less individually. The hope is that everyone will get their $600 and run out and spend it. Many people ask "How will this help, won't it just further the national debt?" There is much truth to this notion, the national debt will increase once again by offering this package. There has also been a lot of criticism toward the president for not increasing food stamp, welfare, or unemployment benefits instead of proposing this stimulus plan. This may be more of a macroeconomics question but where does the government fit in in the market cycle? They give money to households to give to businesses and somehow get back to the government in taxes? This stimulus package seems like more of a quick-fix than anything. Eventually, households will have to pay the money back as national debt begins to diminish. Also, isn't it a bit of a gamble? People may decide to save their money instead of spend which will really not help a struggling economy.

Perhaps I'm just confused, but I'm not alone. Anyone got some helpful information for me?


magila said...

I agree completely! I this this plan is too short-term and we need to be thinking more about long term solutions. Though some people do, I don't personally run out and buy things when I get money... I'm a little more practical than that, and I think a lot of other people are as well.

savannahc said...

The economic stimulus plan is definitely not the proper way to go about fixing our economy (not that I have the solution). While this plan sounds great in theory, the truth of the matter is as you say, the money will be saved, not put into the economy and we, the people receiving the money, will eventually end up paying it back in taxes. You would think our government might want to attempt to come up with a plan that doesn't involve us borrowing $150 billion from china. or any country for that matter.

Brent said...

Yes, the economic stimulus plan. It sounds very dumb to me, to borrow money from China to in essence give it a big chunk of it back to China since we are big trade partners with them. So basically we want debt with China? Its a very confusing plan to me and I'm sure there is more to it but it really doesn't seem like it will help much. I just wonder why they do this instead of focus on the other activities going on that are causing these middle income americans to pay more taxes.

KM said...

Basic macroeconomic theory says that if you get money into people's hands, they will spend it. It's not seen as a rebate on the taxes you are paying (which is what it is - you've earned that money, it's not free) - it's seen as ...

"Oooooh, I just got a check in the mail for FREE money!"

Sadly, the vast majority of people will spend it. I don't recall who had the blog on the savings rate in the US - but it is in the negatives. As in, not only do we not save our money, but we overcompensate and use credit to such a degree that it wipes out our savings rate.

But - in Asia, specifically Japan and China, the savings rate for individuals falls in the 12-15% range. That's awfully tempting to use as capital.

The fear is that we are on the edge of a recession. We are not in one yet (you need 3 consecutive quarters (3 month time periods) of negative GDP). GDP shows growth - it is the monetary value of all goods & services made in a country in a specific time period. If the percentage shown is in the positive, it means we're making more "stuff" than we were before. If it's in the negative, we're making less stuff.

Anyway - our GDP is falling, but not in the negative. So, we're still making more stuff, just not as quickly as we were before. Voila! no recession.

The fear of a recession is mind-numbing. The gov will do just about anything to make sure we dont' fall into one, or if we do, it will be short and not-so-painful. It's bad politics to be in a recession. What many of them haven't grasped is that recession is not only natural, it's necessary. You need it to push creativity and invention. That creative destruction that Wheelan talked about - happens during those bad times.

The idea behind the rebate is that if we take that money and run out to buy stuff, it will force companies to make more stuff, which will mean GDP will rise again.

The problem, of course, is what y'all have pointed out. Where is this money coming from? How could this possibly help long-term? They're taking the chance that people will save the money instead, etc.

Will it work? Probably, for a very short period of time. Is the answer to borrow from a foreign nation?

Well, I have my own opinion on that, but that's not what this class is about. :)

What will we do with ours? Right now, the plan is that it's going to help pay for our new dryer. We have until June 23rd to pay it off without having to pay interest. That would be sweet.

KM said...

Ack - missed this part:

This may be more of a macroeconomics question but where does the government fit in in the market cycle? They give money to households to give to businesses and somehow get back to the government in taxes?

Exactly. Yes, it's macro, but gov falls into the middle of circular flow. It takes from each area (HH, Biz, Prd Mkt & Fctr Mkt) in the form of taxes, and returns to each in the form of some type of gov assistance and/or incentives.