Why It Shouldn’t be Called a “Stimulus”

Rather, it should be called a “laying of the groundworks for future economic expansion that benefits everyone.”

I know, doesn’t have quite the same ring to it, and perhaps a syllable or two too long, but calling it a “stimulus” is rather misleading in my opinion, because the ordinary usage of “stimulus” implies that it is a short burst, not a sustained effort. And a short-effort is, to use the cliche, to let a crisis go to waste.

But first, let me try to address some of the claims that the GOP has been making regarding both the nature and the content of the economic recovery plan. First, the claim that the whole thing is just going to create an unsustainable budget deficit in the future is sort of like worrying about the wine spill on the carpet while the house is on fire. Currently, the US economy is experiencing a significant shortfall between what it is capable of producing and what it is actually producing, and this gap has to be made up somehow or else the economic contraction becomes permanent. In other words, the whole pie shrinks, and everyone gets less. Deficit spending should not be on the top of the list of things to worry about it, because an economic depression shrinks government revenues as well, thus making the deficit even harder to pay off in the future. And all this zeal about balancing the budget is really rich, coming from a party that lowered government revenue by cutting taxes while simulantenously carrying on not one, but TWO, wars.

So yes, in order to counter the economic contraction, someone has to make up the gap between potential and actual economic output, and the private sector has proven to be unable to make up that gap. And since we’ve pretty much blew our wad in terms of monetary policy (the Fed interest rate is effectively at zero), fiscal policy is all that we have left. And it is not as if government fiscal spending will have no multiplier effect, so we are getting more in return than what we spend. In addition, making up the gap, through job creation and income supplements means more tax revenue, which means we ultimately save more money in the long run.

Now, onto the content of the economic recovery plan that the GOP opposes. First, the GOP believes that more tax cuts is the answer, and this is just so wrong on so many levels. First, there is no multiplier effect associated with tax cuts, so you are not getting as much back as you could. Second, tax cuts don’t ultimately close the gap between potential and actual economic output. Companies won’t be hiring new people or using their capital (both fixed or not) because there isn’t enough demand in the economy for the products and/or services companies produce. And there isn’t enough demand because people are losing jobs, so they are cutting back on consumption. And if they are cutting back on consumption, the demand for products and services decreases. Thus, a contractionary cycle emerges. So giving tax cuts to businesses doesn’t solve the underlying problem with our economy. What about giving tax cuts to individuals? Such a move could make some sense, provided that its progressive: meaning that the poorest people receive the most tax cuts, because poor people have a higher marginal propensity to consume than rich people, so they are more likely to spend that tax cut in the economy itself. But that’s not what the GOP is advocating: it is advocating across the board payroll tax cuts that don’t discriminate between various income levels, thus making the tax cut less effective than it could be. Second, compared to employment creation, income tax cuts do not have that multiplier effect, because a tax cut is simply pocketed, whereas creating a new job means producing additional economic activity on top of what the individual is making while working on that job.

And if the GOP is serious about the quickness of the turnaround, then it ought not to be opposed to assistance to state and local governments, because they provide services and entitlements for the poor much quickly than the federal government can. States are being hard with new found burden on their unemployment and insurance welfare rolls because of huge unemployment numbers. So the quickest way to  make sure that the most vulnerable members of society do not suffer that much is to keep them solvent by giving them federal assistance.

The GOP is arguing that compared to infrastructure projects, tax cuts is a much quicker stimulus. They are right insofar as tax cuts are quicker, but they are not “stimulating” in any meaningful way for the reasons listed above. And this is where the choice of words become important, because if the chosen word is “stimulus,” people will focus on how quickly this policy will “work,” not on how effectively it will work.

I make this argument because to me, government spending should produce economic benefits that are 1) public in nature and 2) equally beneficial to all, because after all, we are using public funds for this. In that regard, spending on infrastructure (whether it be physical or human), healthcare, and the environment all qualify because all three are public or semi-public goods, their economic benefits are enjoyed by all, and all private economic activities in the future will benefit from their expansion. Improvements in our physical infrastructure is a public good because everyone will benefit from better roads, bridges, ports, airports, rail, and transit. In terms of human infrastructure, all private economic activity in the future will benefit from a better educated workforce. Same with lowered healthcare costs and better coverage. This is not to even mention the environmental benefits, which everyone gets to reap in the future.

Will these things take time? Well, compared to tax cuts, yes, but they will ultimately expand the whole economy and thus making the pie larger for everyone. So to me, it is a danger to overuse the word “stimulus,” because that would ignore the beneficial long-term economic effects of this proposed economic recovery plan. Is the plan ambitious? Without a doubt, but ambitious public programs have helped our economy expand in the past: the Tennesse Valley Authoriy modernized the Southern economy, we still utilize buildings built by workers in the WPA, our private sector R&D was spurred on by government programs that produced both the nuclear bomb and the computer, so on and so on. And all of these programs have made our economy grow, so we have to keep an eye on the long-term effects of an economic recovery package.

Well, I guess I’m just pissed off at all the fallacious, empirically unsound arguments that have been made by the GOP on the economic recovery package. Sometimes that anger really gets the best of me.

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