1/28/2008

Do they really know what they are doing?

During the last week Washington has rallied to show us that they can “work together” and benevolently hand the common people a few dollars in hopes of stimulating economic activity. We also saw the Federal Reserve cut rates in hopes of swaying the U.S. Economy away from a possible recession. What are the real consequences of these actions taken by our political and financial leaders? Will economic growth be stimulated and move us into prosperous times or will there be unintended consequence that actually move the economy in the opposite direction? The unintentional consequences are what worry me. Dubner and Levitt in a NY Times article discuss unintentional consequences citing three different examples of good intentions causing unintended result. We all know that you don’t get something for nothing and someone will have to repay the Government rebate checks. These rebates are in essence a loan and they will need to be repaid sometime. Will the dollar weaken further and inflation rise because of drastic rate cuts. Some believe that the possible unintended consequences may lead us to repeat the 70’s and 80’s with high inflation followed by high unemployment. We will have to wait and see the consequences, intended and unintentional, as they unfold over time. NY Times Article

6 comments:

Trinity said...

As you stated, there are many unintended side effects that may come from these rebates and rate cuts. The dollar will weaken further as foreign investors seek better rates in other countries. The debt taken to pay the rebates will no doubtably cause the problems with the national debt. The country's "risk-free" credit image might be effected which could cause countless problems worldwide.
It is also possible that the changes will have a relatively unnoticeable negative effect and the stimulus will be a wonderful idea. Perhaps no one will know until this is all passed.

Dr. Tufte said...

-1 on Trinity (waived) for a spelling error.

This is worthwhile to think about, although I think Trinity's concerns are overblown.

This sort of "policy" is the equivalent of getting a check, for cash advance to be added to your principal, in the mail from your credit card company. It certainly isn't a good idea. But, it's a pretty benign one. All the reasons for thinking that this won't do much to help the economy also amount to reasons why it won't do anything bad to it either.

Gavin said...

Extra Credit - Dr. Tufte
Dr. Tufte is it really a cash advance? I keep hearing multiple explanations for this policy. I am now told that it is a refund of taxes. Is the government refunding taxes or are they borrowing money to hand out?

TheFindlay said...

Dr. Tufte
I think the whole stimulus thing is much easier than we all think. The government is just giving money to us that they can’t invest in better ventures. It will not come from next year’s taxes or any of that hogwash. WE PRINT OUR OWN MONEY. Subsequently, the government will always have an never ending supply. For example: If we actually followed the gold standard we would not have financed the Second World War and the rebuilding of the aftermath. I know it sounds like a conspiracy theory but nobody else can give you a more accurate answer, even though it might sound better.

Jacques said...

Dr. Tufte suggests that all reasons to think the rebates will be bad equate to the same reasons for the checks being good, but I think the real issue is the overall effectiveness of the package. I think the stimulus package was lazily put together to appease the interests of our politicians. I believe a better option would've been to fund the rebuilding of our nation's crumbling infrastructure. At least we could comfortably predict one positive outcome for certain.

Dr. Tufte said...

Recommenting three months after the fact, points up why the government gets away with this: the only word about this that people remember now is "stimulus". All the details have been forgotten. They won ...