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.