Stimulus Package Bubbles

Stimulus packages keep getting bigger. This one is either $800 billion or $900 billion or even more or even less depending on who talks about it.

That should be our first worrisome clue.

Democrats want to get those stimulus dollars out there quickly so they can take credit for improving an economy that would likely have turned around anyway. The Republicans are holding out for more tax cuts. Big surprise.

I have been predicting to Members of the credit union I work for that the economy will turn around and the recession will be over on June 15th at 2:30 in the afternoon. It will be a largely jobless recovery for another twelve months during which the mortgage issues will settle down and the companies we bailed out will actually start spending the money we gave them…I mean loaned them…wink-wink-nudge-nudge…in ways that will begin to actually employ people.

I have no idea what this stimulus bill will look like when it finally passes, and I really don’t care because it is irrelevant to our eventual recovery. I wish all it took was to give people anywhere from three hundred to twelve hundred bucks in extra spending money, but things just are not that simple.

But things are not all that complicated either. What typically happens when stimulus checks arrive is local economies have a nice little surge. There is a sudden spike in local sales of TV sets and barbeques, or other consumer goods. Restaurants do a bit better for a while and trips to Disneyland increase.

People feel better and consumer confidence improves. This is a good thing, because recessions are what happen when the reverse is true

But then the money is gone and the effect doesn’t last long enough to add new jobs or lift anyone out of their current economic situation. If they were struggling before, the checks will only help temporarily. Incidentally, those who are really in trouble, and there are a lot more of them now than in 2001, will use the money to pay the rent or buy food, both laudable behaviors but generally not very stimulating.

Worst of all, from the ordinary person standpoint, is people will often go farther into debt in anticipation of the rebate without paying the balance back down when the money arrives. More on that tomorrow.

It may be obvious that I am not a fan of this or any other stimulus plan. The reason of course, is THE GOVERNMENT pays for it.

Newsflash: THE GOVERNMENT has no money.

When you look at the text of the bill, you will see that the money simply comes from the treasury. The treasury gets money from the taxpayers. The taxpayers are the ones getting the stimulus payments and then at some point in time turn around and pay taxes that are stored in the treasury. Frankly, there will probably be borrowing as well. More debt, goodie.

It is somewhat akin to the notion of stirring water around in a bathtub and expecting the level to rise.

But what if you add some soap to the water? Then when you splash it around, the bubbles form on the surface and have a two-fold effect. First, the level appears to rise while adding nothing. Second, they obscure what is going on beneath the surface.

Now you know why politicians like stimulus packages so much.

Unfortunatly, just like tech bubbles and housing bubbles, stimulus bubbles also pop eventually.

More tomorrow.