This post, as so many of mine are, was spawned by listening to the planet money podcast on a similar topic. There were a few things they didn’t cover, or didn’t cover sufficiently, which I’d like to address.
A third of the stimulus was tax cuts.
I’ve written about tax cuts before. Let me say again, the stimulative factor of tax cuts is pretty low, and only really effects certain demographics. They’re political fodder, because people like the way tax cuts sound, but not the way bailouts sound. Mind you, if the individual was bailed out, they might be singing a different tune. But anybody who draws a wage in this country, who is above the poverty level, pays taxes in the pay-as-you-go system. Meaning that, you and your employer, pay your taxes through a withholding each pay period. When you get excited about tax cuts, you think, oh goodie, I’ll have more of my pay check. But that isn’t necessarily so. If they change the tax rate, it would definitely recalculate, but changing the tax rates is even harder to do politically than getting bailout money—and for very good reasons. Otherwise, so long as your withholdings remain the same, the same amount gets withdrawn out of your pay check. No more money in your account, that is, until you get your refund. Or unless you got one of those measly stimulus checks.
So in other words, for most of the populace, a third of the bailout money, was doled out in tax cuts that will get spent in one month the following year. Same with your stimulus checks. Spent the day after they were received. Yeah, that will influence demand for the year.
And that’s if you spent it, if you’re like most people, you’re just barely getting by, and you’ve got bills piling up frenetically. So your stimulus checks don’t stimulate demand at all, instead they go into the accounts receivables of your phone company, mortgage, lease, college loan, or what have you. Which is money, get this, that they’ve likely already booked as income! So no new demand there!
A third was doled out in the form of transfer payments:
Transfer payments is a fancy economic term, all it means basically, is money you’re entitled to without working for it. Social Security, Unemployment, you get the picture. This money is definitely more effective as a stimulus. Even the Miltonians agree these can be pretty effective. They’re called automatic stabilizers, payments that get made through current welfare systems that help even out the blips. It’s getting paid out more often, at different times. That props up demand, which is great, but not good. The Miltonians of the world hate this, because they argue that it’s “fake” demand. And its hard to resist this argument. The only argument against it, is that its kicking the can down the road until the good ship Economy rights itself (Keynsian) or spreading the pain of recession indefinitely (Miltonian/Hayekian). Personally, I favor the Keynsian approach here. The good ship Economy is such a complicated thing, that kicking the can down the road indefinitely is entirely possible, and the next good wave that hits, will take care of any debts accrued during the can-kicking phase. Problem is, how long till the next innovation? And won’t that just be a bubble economy too?
So yes, like the great unwashed, I don’t think the stimulus was particularly effective, only a third of it got spent the way I think it ought to have been. But, another third of that was very effective at keeping people out of the streets. And, America without the stimulus? Full scale race riots, rampant power outages, civic services plummeting, healthcare costs exorbitant crippling families for generations, dogs and cats, living together, mass pandemonium.