Monday, July 7, 2008

Obama’s (not so) higher thinking: a second round of stimulus checks

Barack Obama announced his plan for a second round of government stimulus on Thursday following the June employment report. I am willing to brush aside the fact that the U.S. government lacks any fiscal restraint whatsoever to get to my more pressing point: A stimulus plan is excessively transient, lasting only 6 months or less, results in lower growth after the checks stop flowing, and is inherently inequitable!

The Wall Street Journal quotes Barack Obama on his not so nuevo stimulus plan:

Mr. Obama renewed his call Monday for a $50 billion "second stimulus package that provides energy rebate checks for working families, a fund to help families avoid foreclosure, and increased assistance for states that have been hard-hit by the economic downturn."

I guess the government feels that since it is already so heavily indebted, why not dump a bit more into a struggling economy. The first stimulus plan worked, keeping the economy out of a recession, but a second stimulus plan would be excessive. Other government agencies, like the Federal Reserve Bank, have already set in motion $450 billion worth of funds that are still in the pipeline. Just wait. Money will come a little easier, and the economy will pick up.

Why the stimulus plan is questionable

The current stimulus plan is extremely short-lived, and the positive growth effects will last only four months. According to the Bureau of Economic Analysis (BEA), rebates checks totaling $48.1 billion were sent out in May and $1.9 billion in April. Some of that was spent (real consumption rose by 0.4%) and some of that was saved (saving rose to 5%). Admittedly, if the checks had not been issued, consumption growth would have been smaller, or even negative. The economy may already have started to contract (recession).

The IRS announced that all of the checks will have been released by July 11, so expect a boost to the economy (no recession) through July. However, what they don’t tell you about is the hangover period following the stimulus dates. Consumers come off of their “income highs,” resulting in two or three months of spending that will be lower (again, possibly negative) than it would have been without the stimulus plan. In economics, we call this consumption smoothing. So, is the transient plan plus a hangover worth the $158 billion higher budget deficit? Yes. However, given that the U.S. government is now -$568.5 billion in the hole and gas prices continue their sharp climb, the stimulus plan was a risky endeavor.

I have a much more selfish reaction to the stimulus bill: it is highly inequitable. The tax-payers that contribute the largest share of funds to the government (a.k.a., rich people) did not receive stimulus checks. I paid taxes, my husband paid taxes, my father paid taxes, Warren Buffet paid taxes, but none of us received a stimulus check!

The government targeted a lower income bracket (up to $150k per household) to receive a check ($600/person or $1200/couple) thinking that middle-class America would be more inclined to spend the check and less inclined to save the check. Less saving and more spending stimulate the economy.

Really, I will gladly spend money if the government asks me nicely. Here is a photo of what I would have purchased had I received $600 from the government with a little note encouraging me to spend, rather than to save.

I know - a bit excessive, but who wouldn’t want a pair of fantastic Prada shoes paid for by Uncle Sam? There, Congress, all done – I spent your money and the economy can benefit from it.

The first round of government stimulus is short-lived with a hangover of reduced growth after all of the checks are spent, and more importantly, inequitable. Obama’s second round of stimulus, valued at less than half of the first round’s worth, will be over before it starts and still inequitable.

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