Economic Stimulus Package

I was taught, and have come to believe there is no "free lunch". Unfortunately many Americans believe there will be a "free lunch" - that they will get a benefit without having to pay for it. Whether it is spending on a credit card beyond their means of repayment, or overextending to purchase a home in an inflated market, Americans seem to be blissfully ignorant of the consequences of their decisions. Now it is time to pay the piper. The housing bubble has burst, the debt burden is catching up to people, consumer confidence and spending drop, and "Presto" we have fears of recession. And in an election year! What is an incumbent to do? Well, pass an economic stimulus package of course. This will provide the "free lunch" that everyone needs to feel like they can go out and spend some more. Knowing Americans they probably will use the money to make additional purchases rather than paying off debt, saving or investing. The effect on the economy will be transitory, but perhaps it will be the right medicine at the right time. And we as taxpayers will be paying for this $168B stimulus package in the long run.


Gavin said...

This is definately not "free lunch", there will be consequences in the long-run for the rebate. We will probably know if the stimulus had a positive effect long before the checks arrive. Consumers are likely to run up $600to $1200 on their credit cards now. When the checks come later in the year consumers will apply them toward their credit card balance.

Dr. Tufte said...

The surprising evidence is that on net most people actually don't spend this sort of rebate.

Anyway ... I'm a bit surprised at the tone here. Bitsy and Gavin are taking the government's statements at face value that 1) the package will be a stimulus, and 2) that a dollar value can be attached to it of about $150B. Most of us don't think the government is very effective at accomplishing things - if that's the case then their stimulus package is not much more than hand waving. We just tend to take hand waving more seriously when we don't approve of it.

Jacques said...

SUU faculty, Steve Harrop, had a very well written editorial in the Spectrum this morning on the subject of American attitudes toward consumption and government intervention. He reminds us all that there never was such a thing as a free lunch. The money that comes from the "stimulus" package and the supposed mortgage bailout is being funded by our tax dollars in the first place.

Also, I agree with Dr. Tufte that these efforts will largely be ineffective at quashing a near-imminent recession, but most Americans expect our government to do something. Without government intervention, many would call our officials out as being irresponsible, when inaction would likely be the more responsible way to go.

Anonymous said...

I hear from others (people and websites) that econonomic stimulus package is not going to help recession. It might a little, but we won't be completely out of recession because of this package.
Oh yhhh read my newest post - it would be really interesting!

Trinity said...

Dr. Tufte brought up the point that people are happy to agree to policies that are completely inane when it benefits them but are quick to fight back when the policies hurt. I have lost all faith in the public in general. I've had someone ask me if I would be angry if I lost my grant for school because I was preaching against government handouts. I would be happy to give up that money if it meant the government would stop their handouts. I try to stick to my principles even when they hurt me and I wish the rest of the country would too.

Also, Dr. Tufte had a material misrepresentation (whether accidental or an intentional approximation) I wanted to correct. The dollar value from the post said $168 Billion and he said $150. No biggie.

William said...

Dr. Tufte,
I agree with you and think that this will cause little to no stimulus. It seems that the government does not understand basic economics. It seems that they are making things worse off by giving this money out to us. I think they should use the money instead to educate the public in basic economics, so many people do not know the basic concepts. I feel that so many times the government does things that look good on the face value, yet when you look at it closely it seems to make us worse off. And the sad thing is, is that most Americans take what the government says for accurate and they do not look into the matters or have an opinion for them self.

Reagan said...

Dr. Tufte-Extra Credit

You are correct that this is little more then hand waving. I really like what the department chair of economics at George Mason University said in the article. Any stimulus money added to the economy must be extracted from the economy in the form of taxes, lower spending, or borrowing. Taking the money out of the economy to give to consumers to put back into the economy is just a bunch of politicians jumping up and down waving their hands. What are we to do? We might not think that it will hold of a recession and disagree with the way the money was generated but I don't see anyone turning the money down in disapproval either.

TheFindlay said...

Dr. Tufte
I would like to know where you get the numbers stating that citizens will not spend the rebate because everyone I talk to has already found something to spend it on. Americans have shown that they are currently poor decision makers when it comes to debt and spending. I think this will undoubtedly be a stimulus for the economy. The question I ask is, “Will it even matter?” Unfortunately I think time can only give us the answer.

Dr. Tufte said...

Trinity: I said "about $150B". They are throwing the number $168B around, but I would claim that this is uncertain.

thfindlay: the theory for this is called Ricardian equivalence, and it has been seriously tested.