Stimulus 3.0?

Alan Aronoff
We are now in midst of spending the money of the second stimulus spending package to revive the ailing economy. The first stimulus enacted in early 2008 under President Bush called for government checks to be issued in the amount of $152B. Now, Laura Tyson, former head of President Clinton's economic team is calling for a new stimulus package. The first stimulus did not accomplish its mission, and so far, the $787B stimulus biggest effect is growing government, not the economy. Can a third stimulus correct the deficiencies of the two stimuli already enacted?

The first stimulus to counter the slowing economy was enacted in early 2008 allowing for $152B in tax ‘rebates' to low income and no income tax payers. This stimulus has proven ineffective, as the recipients of these checks chose to either pay down debt or save the money. These payments created no increase in GDP. As the US and world economies are based 70% on consumer spending, any stimulus must get consumers spending.

Consumers are looking at the destruction that the Great Recession has wrought not only on home values which are down 32% from the peak in Q2/2006 according to Case Shiller, but also the destruction of asset values and account balances in retirement accounts, and have decided to reduce spending. The loss of jobs, with the unemployment rate now at 9.5%, (and as President Obama warned, it will go higher in the next few months) has driven consumers to become defensive. Americans generally understand that the stimulus is temporary, and just as in the Great Depression, the creation of temporary jobs, leads people with a feeling that their current employment is subject to forces greater than they can influence.  As a result, people are motivated to save rather than spend.

In addition to people de-levering their balance sheets, companies are doing the same. The movement by this administration to force high energy prices via cap and trade scheme, and the potential impact to business due to pending health care legislation creates uncertainty, and uncertainty is not conducive to job creation. In addition, as the Chrysler bankruptcy has shown, the rule of law may not apply to secured creditors, causing investors to pause before committing new investments.

 This is not a business cycle recession. This is a recession caused by the destruction of credit and along with it, the asset values of real estate and financial assets. Change and the hope for more change will delay recovery because of the economic uncertainty that comes with it. The US is going through a credit contraction that is similar to Japan's in the 1990s. And in the case of Japan, the various stimuli programs in Japan increased the Japanese government debt to over 100% of its GDP during the last two decades of Japanese economic stagnation. The current Administration and its economic advisers do not appreciate the lesson of Japan in the lost decade, nor do they appreciate that the remaking of the American economy in the image of socialist Western Europe will cause an unneeded extension of pain inflicted on the people the government is supposed to serve.
We are now in midst of spending the money of the second stimulus spending package to revive the ailing economy. The first stimulus enacted in early 2008 under President Bush called for government checks to be issued in the amount of $152B. Now, Laura Tyson, former head of President Clinton's economic team is calling for a new stimulus package. The first stimulus did not accomplish its mission, and so far, the $787B stimulus biggest effect is growing government, not the economy. Can a third stimulus correct the deficiencies of the two stimuli already enacted?

The first stimulus to counter the slowing economy was enacted in early 2008 allowing for $152B in tax ‘rebates' to low income and no income tax payers. This stimulus has proven ineffective, as the recipients of these checks chose to either pay down debt or save the money. These payments created no increase in GDP. As the US and world economies are based 70% on consumer spending, any stimulus must get consumers spending.

Consumers are looking at the destruction that the Great Recession has wrought not only on home values which are down 32% from the peak in Q2/2006 according to Case Shiller, but also the destruction of asset values and account balances in retirement accounts, and have decided to reduce spending. The loss of jobs, with the unemployment rate now at 9.5%, (and as President Obama warned, it will go higher in the next few months) has driven consumers to become defensive. Americans generally understand that the stimulus is temporary, and just as in the Great Depression, the creation of temporary jobs, leads people with a feeling that their current employment is subject to forces greater than they can influence.  As a result, people are motivated to save rather than spend.

In addition to people de-levering their balance sheets, companies are doing the same. The movement by this administration to force high energy prices via cap and trade scheme, and the potential impact to business due to pending health care legislation creates uncertainty, and uncertainty is not conducive to job creation. In addition, as the Chrysler bankruptcy has shown, the rule of law may not apply to secured creditors, causing investors to pause before committing new investments.

 This is not a business cycle recession. This is a recession caused by the destruction of credit and along with it, the asset values of real estate and financial assets. Change and the hope for more change will delay recovery because of the economic uncertainty that comes with it. The US is going through a credit contraction that is similar to Japan's in the 1990s. And in the case of Japan, the various stimuli programs in Japan increased the Japanese government debt to over 100% of its GDP during the last two decades of Japanese economic stagnation. The current Administration and its economic advisers do not appreciate the lesson of Japan in the lost decade, nor do they appreciate that the remaking of the American economy in the image of socialist Western Europe will cause an unneeded extension of pain inflicted on the people the government is supposed to serve.