Stimulus: A Cheap Thrill or Lasting Satisfaction?
The idea behind stimulus is that government will spend tons of money to hire people and increase demand for goods, and thereby revive the economy. And the cost of capital (the interest expense generated from loss of holding cash or from borrowing it) will be much cheaper than the net benefit we will derive from stimulus, thereby improving the economy (companies use the same analysis in determining whether to borrow funds to initiate capital projects). With interest rates at an all time low, this argument does have merit. However, while this all sounds good and merry, there are plenty of downsides to going about things this way, which our politicians have conveniently kept out of the common discourse. These are (in no particular order of importance):
- We Don’t Have the Money — Therefore, we will have to borrow it. Unlike a situation where the Treasury is sitting on $2 trillion of cash just waiting to spend it all, we have a major fiscal deficit and have already spent $1 trillion (or soon will) bailing out the banks, insurance companies, and now auto companies.
- Government Again is the Arbitrator of Funds– In many ways, stimulus is an excuse to make Government yet even larger. And with that will come all the waste, misallocation, and abuse that we will inevitably see down the road.
- Politicians Will Tag on Wasteful Programs Labelling them “Stimulus” — This ties into my point above.
- Inflation — Printing and borrowing all this money will cheapen the value of the dollar. It will also increase demand for commodities, which will take those prices back higher and negate some of the benefits we are now reaping from low oil prices (this will be further discussed in a near-future post).
- Geopolitical Concerns — Who will lend us the money, especially so cheaply? The only people who can and would do this are the ones (a) that have the money & (b) whom will expect non-tangible returns for their loans. These are the Chinese, middle eastern oil producers, and Japanese. While Japan is our friend, we have a complicated relationship with the Chinese and with the Arab world. What concessions, on human rights and other matters, they will demand in exchange for their capital remain to be seen. For example, we currently owe China over $500 billion and I have heard this may already really be over $1 trillion.
- Didn’t the Japanese Do This in the 1990s? – Japan, entering recession in the 1990s (which was caused in part by a real estate crash), tanked interest rates to zero, depreciated the yen, and spent billions and billions on bridges and roads. It still took them a decade to recover. Though Japan’s economy is quite different from our’s, this is an onerous sign for our stimulus.
- How Will We Repay Our Creditors in the Future? — The hope is that we can do so from an economic turnaround somehow. Of course, nobody discusses this problem since it has no easy answer. I guess we will just punt this problem to the next lucky generation . . .
We already had a $150 billion stimulus package released into the economy in early 2008, and we see how little impact it had for the economy. It seems like nobody is really willing to look into what went wrong in stimulus package #1, and fix those mistakes for #2. This last, admittingly crude joke can explain one scenario where stimulus is a complete waste: Mr. X took his $600 stimulus check, rented a foreign-built SUV, drove half across America into Mexico, and hired a prostitute there. He sure achieved stimulus — but this didn’t help our economy since all the money went towards things either bad for our country or where the money goes overseas!
Lastly, I would recommend reading this Wall Stree Journal article from an opponent of stimulus to obtain a better picture of what it’s all about: http://online.wsj.com/article/SB122663413095027641.html
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
on 
on