The Economic Stimulus Bill: Will The Heavy Debt Be Worth It?

by Silicon Valley Blogger on 17 February 2009 21 comments
Photo: Greefus

In recent weeks, I've gotten into some great discussions with people about the stimulus bill that was cobbled together by Congress last week.   At one point, one of the proposed versions of the package grew to a staggering $900 billion until it was wrestled back to a relatively trimmer $800 billion.  I suppose we should thank our wonderful leaders that they were somehow able to spare us the additional debt.

A lot of people are still preoccupied about where their stimulus check is, but let's look at the big picture for the moment.  Now that the stimulus package details have been released, I've found many people weighing in on both sides of the debate: is the plan justified? 

The Hotly Debated Economic Stimulus Bill

Some of the arguments and concerns I've read have been swirling around these points:

  1. We need to spend for the short term. Spending is expected to take us out of the hole we're in. Many students of Keynesian economics and past history will vouch for the effectivity of this approach.
     
  2. We'll be in deep debt as a nation for many generations. We are sacrificing our future and our children's future to speed up the economy's recovery.  Many personal finance enthusiasts maintain this concern, as many of us are debt averse.
     
  3. We need to define "stimulus". What kind of spending should this bill contain?  There seems to be spending provisions here that should be part of a different kind of budget (e.g. could some of these proposals turn into "pork")?  Many students of politics know that this bill can be a magnet for determined lobbyists who can spin a tale of "stimulus" into any cause they drum up.

How Effective Is This Stimulus Plan?

The hefty economic stimulus package is jampacked with provisions that try to please everyone. According to this CNN report, the big "winners" (whose piece of the stimulus pie grew larger by the final version) were in the areas of transportation, health and science whose allocations were in the multi-billions. As for us regular people, we'll be awaiting tax cuts to the tune of $400 per individual or $800 per family.

Issues With The Tax Cuts

Do you wonder whether this bill will be effective enough to resuscitate our crippled economy?  Will there even be enough consumer spending done at all?  Tax breaks and tax deductions are nice, but the question remains whether the general population will actually be putting that extra money to good use.  Here are just a couple of scenarios that can potentially deflate the consumer spending goals of this stimulus plan.  What if:

  • We spend the stimulus money on the wrong things.  Apparently, the first wave of stimulus checks didn't really achieve its desired effect. The spending was misplaced, with reports surfacing that consumers where using the money on imports.  So let's see how that works: we borrow money from foreign interests, from which we get funding for our economic stimulus checks. Then we turn around and spend the bucks on things manufactured abroad.  A vicious cycle if I ever saw one.
  • We bank our tax credits. What if people collectively take a step towards self-preservation, and decide instead, to keep and save the money they receive from the government?  Then any economic stimulation won't be coming from the consumers and those tax cuts will be for naught.

Issues With Government Spending

Well, we can at least expect that there's going to be some serious guaranteed government-funded spending. We can count on the majority of the package that's dedicated to national spending to hopefully get us out of the doldrums. Just please don't let the rumors be true that multi-millions will be going to green golf carts for government officials or to save the endangered salt marsh harvest mouse (a noble cause for a different budget).  

Our debt load has ballooned to an astonishing 1.5 trillion in just a year if you add up Bush's bailous and TARP funds to Obama's bill. Maybe we should enjoy our tax cuts now while we can, because we'll be paying the financial piper for a good long while. 
 

 

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Guest's picture

I think you've raised some excellent points here and one can't help but wonder if it would not be more beneficial for future generations if we all learned to get by with the cards we've been dealt. What if we learned from this recession, the lessons that won't be received from the bail-out - such as how to become both self-reliant and community-driven, by relying on one another, sharing what we have, and using the best of our innovative and creative minds to create new sources of income and social support?

Guest's picture
Guest

"what if" is a question too late to ask, I'm afraid. The deed is done - God help us and our children.

Guest's picture
funkright

No, we need to help ourselves.. there is nothing apocalyptic in this situation. The USA and other countries have run much higher debt (as a % of GDP) in the past and things have improved over time. We need to be positive and use the tools that are before us. We need to build society up & not tear it down. We need to learn from our mistakes.

Guest's picture
Guest

I am less concerned with the spending portion of the bill, although it seems too small to make the difference that everyone touts, than the tax breaks that were shoved in. Both parties repeated the mantra that this bill had to be "targeted and temporary," but Republicans in the senate (my sneator Collins among them) shoehorned in a fix for the AMT, which is predicted, by economists including GWB's chief advisor, to return 22 cents on the dollar. The plan to help laid off workers maintain their health coverage, meanwhile, was cut from a 75% assist to 60%. The same economists gave that a return of $1.25 on the dollar, and it is inherently targeted (to those who would otherwise lose health coverage) and temporary (it sunsets in 2 years). While I think the AMT gets far too many people of relatively modest income, I can't understand how it was pushed into a stimulus bill.

I also find it incredible that, with so much talk of bipartisanship, less than 2% of Republicans voted for this bill in any form, even after many of their proposals were put in. At some point, the Repubs need to realize that they lost, massively, and pure obstructionism won't help get them back to power or help the country recover from an economic emergency that they are almost universally blamed for. Publicly cheerleading for the stimulus plan to fail, which at least 3 did, seems like the first step in organizing a circular firing squad for the party. I'm not a fan of the Repubs and give them a fair majority of the blame, but I don't look forward to their complete destruction as a national party, which seems the inevitable result of these tactics. Without any positive agenda, I fear that's where they're heading, and an effectively single-party system isn't good for anyone, the country as a whole, or the Democrats. (Think I'm exaggerating? There are no House members from New England at all, and the Repub senator from Maine ran her last campaign on the theme "She can work with the Democrats.")

Chris

Guest's picture
Diana

This bill, like the previous "stimulus" bill, will do little to help our economy. I equate it to putting a bandage on a burst artery: the U.S. will bleed to death unless she goes in for major surgery! Unemployment benefits for people who QUIT their part-time jobs? These kinds of welfare programs will inspire others to sit on their seats and be unproductive because of the notion that "the government will take care of me" has been ingrained long past the days of FDR. Don't worry, though, Mr. and Mrs. John Q. Taxpayer continue to struggle for the good of others who won't think of repaying into the system.

Further proof: read "The Forgotten Man: A New History of the Great Depression" by Amity Shlaes

I see an expansion of government with this bill, making it impossible for the average citizen to get a voice in. This country was based on an idea that the people would have a say and that we ELECT REPRESENTATIVES to hold our best interests at heart (Remember "created by the people, for the people"?). Putting the country in debt, ruining our monetary system, and instilling socialist fundamentals is not the America I want to live in. And no, I won't accept the notion of others who say: "If you don't like it, get out!" I say, "If you like being told what you can and cannot do/say/feel, move to a country where you don't have any personal freedom. Don't bring it into mine!"

Unfortunately, we the people haven't had representation in the government for a long time. Instead we our "representatives" using our tax dollars like their own personal credit card, with no real thought on how this money is supposed to be paid back. Amazing that the same people who fly the flag of "It's for the Children" would sacrifice future generations' Pursuit of Happiness by burdening them with insurmountable debt.

I may not have a college degree from Harvard, but I do understand that in order to succeed in life, you must live below your means, work hard, pass on values and principles to your children, and never stop paying attention to the world around you.

Guest's picture

Be wary of government figures claiming ROI > WACC.
(ROI = return on investment, and WACC = weighted average cost of capital)

Claims that government spending is going to magically return $1.25 per $1 "invested" is ridiculous. GDP is an absurd measure for gauging prosperity, particularly when its compoments are so far out of whack. Government spending is part of GDP, as is consumer spending-the two comprise the bulk of the metric-so artificially boosting both through debt and printing money boosts GDP but leaves the country poorer in the long run. This is why we are facing the current calmnity. Similiar policies have been pervasive for decades.

It feels great to borrow and spend, or worse, to create money out of thin air and spend it. But as everyone on this site knows, such "prosperity" is short lived. Future lifestyle suffers exactly by the cost of the debt. Worse is what happens when the Federal Reserve finances Treasury shortfalls with printing-they debase the dollar and erode the real value of savings. What kind of perverse society punishes savers? That's exactly what America has been doing for decades and why we are now suffering.

Finally, if government spending produced such great "returns" we might as well nationalize everything and behave as did the Soviets, Nazis, and other Communists around the world. The truth is that government spending is never as efficient as spurring growth as private.

Guest's picture
Guest

I find it interesting that anyone is expecting Obama to be their economic savior. Particularly when he was one of the people who wanted that first round of checks that did nothing to go out. It was Edwards and Clinton who said we needed to spend on infrastructure(and wooweee weren't they right). Second, I'm not quite sure how funding ACORN(you know the group who got caught paying people to register Mickey, Minnie and Donald) and the salt marsh mouse is going to stimulate the economy. Finally, it was less than a decade ago people were insistent that a GOP congress and a GOP president meant the demise of the democratic party. How'd that work out? I suspect the pendulum will start swinging back as soon as Americans start to realize they've been had and the Democrats can't and won't deliver because at the end of the day they are just as beholden to special interests as the GOP(and if you think they aren't you aren't following the money and haven't been paying attention to legislation).

Guest's picture
Guest

With due respect, ACORN didn't 'get caught' trying to register Mickey & Minnie as voters. They took registration forms filled out by canvassers they hired and flagged those (and others) as probably fraudulent. The state requires that all registration forms filled out be turned in and they complied with the law. The (Republican) Secretary of State praised their effort to separate out questionable forms. They are, besides their advocacy role, very good at helping people work out a way to avoid foreclosure and, on a wider field, to help people get into a first home. The money they get will likely produce better results, with less cost, than a Federal agency doing the same thing. As for funding Marsh Mouse research, it will produce some jobs and is a worthwhile effort, though I personally wouldn't have included it in a stimulus bill. It is more likely to produce results than giving a financial company the same amount of money to pay for a spa day. Of course, after the bank bailout fiasco, this bill faces a significantly lowered bar to be better.

Chris

Guest's picture
BC

I think this so called stimulus is just going to make things worse down the road. This is still going to take time to see if it works. It may slow the declining economy. I think it's over rated but time will tell.

Guest's picture
Guest

Govt has the credit card and is spending like a teenager.

Guess what is the collateral? You!!! Human Resources.

You don't think banks loan without collateral do you?

Solution: Take away the credit card.

Guest's picture
Guest

Sorry, had to share more accurate information (than what I said previously) about the mouse money.

• Several Republicans claimed this week that House Speaker Nancy Pelosi put $30 million in a bill to protect the salt marsh harvest mouse. We looked into the issue and found that was not the case. There's no money for mice in the bill. There might — or might not — be money for a major coastal restoration project in California that could help out the mice. And a state agency submitted the project, not Pelosi. We rate the claim, made most plainly by Rep. Mike Pence of Indiana, as False.

More detailed information about which claims are true or not, on the stimulus and other government doings, available from http://politifact.com/truth-o-meter/ - run by The Poynter Institute.

Chris

Guest's picture
Roger

...the question is, will it work? The simple fact is, we can't know; even if there was unanimous agreement on the economic merits (or demerits) of the bill, the more important factor is how it affects the national psyche. Will people be more willing to spend (and hire, and start new businesses, and lend out money, and perform all the other financial functions we need in our economy)? Or will the money disappear into various pockets, leaving us in essentially the same situation next year, as we debate what else we can do? I don't know, and until we actually see what happens, neither does anyone else (claimers of success or catastrophe included).

Guest's picture
RC

TARP and the latest stimulus bill isn't even a reflection of all bailout related government spending, such as Fannie Mae and Freddie Mac (neither of which are properly accounted on the government books), the loans to AIG, the deficit of the PBGC, potential FDIC liability, or the worthless assets added to the Federal Reserve balance sheet.

What common sense dictates (and what this article states) is that the government cannot dictate where spending goes. We've already got a country that's got misallocated capital everywhere (credit locked up in the banking system, loaned money to banks being used for unproductive purposes like lobbying, way too much car production) which has yet to correct itself, yet somehow the money is supposed to magically find itself towards productive growth purposes.

Guest's picture
Sam

It's not the job of govt to run the economy. Economies rise & fall - it's a natural thing.
What's unnatural is the govt trying to stave off a depression. This isn't a Democrat or Republican thing & those of you who don't see that are blind.

It is the job of govt to keep the street lights on and protect our freedoms for foreign entities.

This thing just seriously hosed us over as citizens but what do you expect from a President who didn't even serve a full term in Senate? Yeah, he's giving us "change" all right.

Every economist on the nation has said this bill is a mistake but what do they know? The more "stimulus" the harder the crash will be when it comes.
And for those of you who are going to bash me for being a "Republican" I'm actually a Constitutional Libertarian and care only about elected officials doing their job which is outlined in the Constitution. :)

Guest's picture
Guest

Sam said: "Every economist on the nation has said this bill is a mistake but what do they know?" Every economist who has spoken about the current bill has said that it is too small and timid, or that it misallocates funding too much to tax cuts and not enough to job creation and spending. If you can cite a few economists who opposed any stimulus, which seems to be what you suggest, it would be instructive. Even the Republicans who opposed the bill didn't want no stimulus, just a different type of bill.
Also, why does this not pass constitutional muster? The Constitution certainly calls for Congress to "provide for the common defense and general welfare of the United States;" says that "The Congress shall have power to lay and collect taxes, duties, imposts and excises;" "To borrow money on the credit of the United States; To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;" and "To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof." So, Congress must provide for the general welfare, is empowered to regulate commerce and to raise and borrow money and to pass laws to perform these duties. What part of this bill is not covered by those elements. (Read Section 8 of Article 1 of the Constitution).

Chris

Guest's picture
andys2i

The stimulus plan and all the tax breaks may not amount to much in $$ terms for the average American, but the key that it does provide is confidence to the regualr American that the government is doing something. This will give them confidence to spend, boost company profits which in turn spurs economic activity/jobs and gets us out of a recession.

Guest's picture
Guest

Rob Viglione said "Claims that government spending is going to magically return $1.25 per $1 "invested" is ridiculous. GDP is an absurd measure for gauging prosperity, particularly when its compoments are so far out of whack."

First, the return figures come not from the government but from Mark Zandi, certainly not a government economist. Why do you think the figure is ridiculous, and why should we believe you over the vast majority of economists, who concur with Zandi's figures? What will the return be, in your opinion, and on what do you base your figure? Why is GDP an absurd measure of prosperity? It seems to be a reasonable measure, at least comparatively (if GDP this year is twice GDP last year, the country as a whole has produced twice as much; that would seem likely to indicate that prosperity is greater). Again, you simply attack a widely used and widely respected metric without either any evidence that it is inaccurate or any alternative, with evidence that it is better.
Your final paragraph is arrant nonsense -- government spending has no relationship to nationalization. If the government buys a plane, has it nationalized Boeing? This is just far-right Republican red meat, which "everyone on this site knows."
If the stimulus is wrong, finally, what do you suggest? Should we wait for private investment to spur the economy, or what? You offer no evidence and no alternatives.

Chris

Guest's picture
Guest

Considering our GDP has been largely based on housing for the last decade is this really a surprise to anyone paying attention?

That's another thing the "stimulus bill" does nothing to address the mitigating factor that created the recession.

Chris,

Quit accusing people of GOP talking points if you don't like what they have to say. As laudable as saving a marsh may be it isn't going to create the jobs this economy needs. Furthermore, I could care less whether some putz in California praised an organization that runs around criticizing minimum wage while paying its folks minimum wage for their efforts. They have no business being funded in a stimulus bill. None, whatsoever.

Guest's picture
Guest

'Guest' said "saving a marsh may be it isn't going to create the jobs this economy needs." Maybe you didn't read the earlier post - there is nothing about saving the marsh mouse in the stimulus. Maybe that's one of those GOP talking points I shouldn't criticize?
I think it is reasonable to criticize statements made with absolutely no evidence or citation -- like the one about all economists oppose the stimulus. I try to provide some basis for what I say, rather than simply throwing out outlandish statements without anything to back them up.
I would like you to point out where I mentioned "GOP talking points" though - I can't find it in anything I wrote. Ever hear of a straw man argument? You just made one.

Chris

Guest's picture
Guest

The tax breaks part of the Bill are ridiculous, the government needs revenue to offset the debt.

The spending part is sound economics, Keynesian remedies have worked in most downturns, and this one certainly isn't showing signs of being the "stagflation" crisis of the 80s. It might be too little too late, and it's unfortunate that Obama's going to take the blame for a crisis that was made by the Bush administration, but hey, that's politics.

The money would be better spent establishing long-term universal social welfare programs (fixing health-care, universal pensions, other non-means-tested programs) that would create real jobs rather than merely staving off capital flight for a few more years, but those are politically impossible with the republicans in Congress desperately trying to destroy the economy so they can win the next election..

Guest's picture
Allison

Just wrote a blog post on 11 ways the stimulus package will directly affect you and your budget. Check it out, it's a great resource!