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February 06, 2008

The brave new world of finance-3: The 'free money' stimulus package

(For previous posts in this series, see here.)

Clearly I am not the only one that thinks that current fiscal and monetary policies are not only unsustainable but also immoral and that their priorities are completely out of whack. French President Sarkozy, following the discovery of the speculative trading and fraud that resulted in losses of $7 billion at one of France's largest banks Societe Generale, also called for an end to this mad, reckless way of thinking, where short term profits trump everything else.

"The point of a financial system is to lend money for economic activities, which, in turn, generate profits," Sarkozy told a gathering of French nationals at the French embassy [in India].

"It is not to go and speculate on different activities which create enormous flows and profits in a few hours," he added.

"If one can make profits in a few hours, one can also make gigantic losses in a few hours as well. And it is time to realise that (we need) to insert a bit of wisdom into all these systems," the president said.

Because of fears that the US is headed for a major recession, we currently have the Bush administration and the Congress planning to pass a 'stimulus package' to stave that off. A major recession would undoubtedly be a bad thing for ordinary people since it is likely to result in many people losing their jobs, creating widespread hardship. But the current plan seems to be to for the government to spend $150 billion by mailing checks for $600 to each taxpayer, plus an additional $300 per dependent child.

Sending checks to people does not seem to me like a very coherent plan. What is even more bizarre is that the government (and stock market investors) are really worried that people will use this money in a responsible way, by paying their bills, repaying loans, reducing their credit card debt, or putting the money into savings for their retirement or their children's education. What they want people to do is to behave irresponsibly, by immediately rushing out and spending the windfall money on items they don't need, like plasma TVs or other high-priced consumer goodies.

Giving poor people a check for $600 will undoubtedly help many of them stave off some immediate disaster and even hunger. Many people are just one paycheck away from going cold or becoming homeless. But instead of urging people to use this small windfall to avert an immediate crisis and regain their financial footing, the government is actually encouraging people to spend the money on more junk, to indulge in just the kinds of reckless consumer behavior that caused many of them to fall into deep debt in the first place. After scolding people for living beyond their means, we are now encouraging them to do just that. As Bob Park writes sardonically, but accurately:

In case you didn't notice, your 401k is shrinking. Don't worry! President Bush has a plan: send a check to every family in America. People are supposed to spend it on the shoddy merchandise they didn't buy at Christmas. Where is the money coming from? From taxes we paid to end Iraq's WMD program. It worked perfectly; there is not a WMD to be found in Iraq. No one could think of anything except war to spend the stimulus money on (like maybe health insurance for children, or fusion energy, or the International Linear Collider) so Congress agreed to the President's plan to write everyone a check. After decades of public-service announcements telling people to save, we can now expect to be told the opposite. So much for the laws of economics. The program would be more environmentally friendly if they cut out the middleman. Instead of every family, send checks to every business. Operating on a government subsidy would free business from the need to produce more useless crap to sell.

Do such policies make any sense? We have a country in which the infrastructure is crumbling and many people are hopelessly in debt, unable to even pay their mortgages or credit card bills. Why are we encouraging them to get into even more debt by buying things they don't need or can afford? Is this any way to run the world's largest economy?

Furthermore, while I can understand giving really poor people some money, what is the point in giving middle-class and rich people a one-time payment of $600? I personally don't want or need $600. If given it, I will save it to meet some future need. Giving people money and urging them to spend it frivolously seems to me to be equivalent to dropping currency notes out of helicopters and hoping something good comes out of it. Surely there are a lot of other things that could be done that would produce benefits while putting the money into circulation?

I can think of lots of worthwhile ways of spending $150 billion that could have long-lasting and beneficial effects. I would much rather see that money being used for the collective good. How about refreshing decaying urban areas by creating parks and public recreation areas for people? How about improving water and electricity services to deprived rural areas? How about creating a system of low-cost satellite health clinics staffed by paraprofessionals to provide better early care to people, the way that many countries do? How about hiring people to do the many things that need to be done to improve our communities?

Is indiscriminately giving large numbers of people relatively small sums of money the best plan that our great financial brains can come up with?

Next: Past experiences with combating recession

POST SCRIPT: The moral hazard myth

One of the reasons that the US has an insane crazy-quilt health care system, and the source of weird arguments used against universal single-payer health care schemes, is the strong belief among health care economists that providing easy access to health care creates a 'moral hazard', where people will abuse this benefit.

In this New Yorker article, Malcolm Gladwell demolishes this myth.

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Comments

Like you, Mano, I think there are a lot of better ways to spend $150 billion than sending everyone in America $600. But, being a lowly graduate student, I'm not about to let any checks the government decides to send me go to waste. That'll go straight into the savings account. (Although, having just been to the allergist, I might have to use part of it to buy a few of the items they recommended to reduce my allergic reactions around the house. Preventative health care is more beneficial than insurance companies seem to think.)

I think it's a pretty sad thing that I'm 22 years old and I feel like there's basically zero financial hope for my future. There won't be any government assistance when I'm old enough to collect any. My children's college education is going to cost something like half a million dollars a year, and I'm probably already two decades behind on starting to save for my retirement (ha, like that'll happen). And let's not forget that my children, grandchildren, and I will be busy paying off the government's absurd debts from the past eight years.

There would have to be some serious and massive changes in the not-too-distant future for any of that to change.

Posted by Nicole on February 6, 2008 11:12 AM

Mano,

I must disagree. There is reverse psychology here. This is a sop to get the people to give money to banks at the cost of next year's tax return instead of cutting out the middleman and having the politicians clearly bailing out the bank scheme.

This thus results in less political risk than the S&L bailout did so short a time ago.

Posted by A Nonny Mouse on February 6, 2008 02:35 PM

If the government wants to spend $150 billion dollars that it doesn't have, almost no matter the cause, then that itself is a grave problem.

Basically the only thing that sustains our economy is consumer spending and government expenditure now anyways (of the four elements of GDP, consumer spending is something like 70-72% and government spending is about thirty percent combined - the current account deficits with other countries allow for those two to be greater than 100%), so this package makes a lot more sense from that narrow perspective. They absolutely do not want us to save this money because the lack of a decrease in GDP for two consecutive quarters will allow everyone to claim that there is no recession after all.

Because really, macroeconomics is just political economy after all. And if you can get people to think that you're a genius, you win.

Posted by Rian on February 6, 2008 05:22 PM

There was recently a post at the Cleveland Freethinkers Blog that concisely addresses blind faith in free market capitalism.

http://clevelandfreethinkers.blogspot.com/2008/02/free-market-capitalism-as-religion.html

Just thought you'd find it interesting.

Posted by Brock on February 7, 2008 12:55 AM

Nicole,

Things are not as bleak as it might seem for young people, especially on the social security front. The more sober analyses I have seen suggest that socially security is basically in good shape and can be made so with a little tinkering.

What we are seeing, though, is some serious scaremongering that the system is going bankrupt. Why? So that we will agree to taking the trust fund out of government securities and invest in the stock market. Guess who benefits from that move? The financial sector again since they will now have a vast amount of other people's money to play around with and it will raise stock prices.

Posted by Mano on February 7, 2008 03:49 PM