When is a Stimulus Package Not a Stimulus Package? (Updated)

The White House has announced some of the details of the economic stimulus package which I have no doubt will sail through the Congress.

As shoud be clear from my previous posts on the notion of a stimulus package, I’m skeptical. Stimulus packages, generally, have two problems: time inconsistency and targeting. To be effective a stimulus needs to be applied as quickly as possible and be targeted in such a way as to produce the greatest amount of stimulus for the least amount of expenditure.

Regardless of how fast the bill can be passed by Congress, there are limits to how fast the IRS can implement a tax rebate-based plan. The checks won’t come in until June or July, too late to have much impact on whether we’ll actually go into recession or not. Considering the size of the budget deficit, my preference would be no stimulus package but if a stimulus package there must be it should be implemented more quickly than that and targeted towards increasing consumption of things we actually produce here in the U. S. rather than goods produced in, say, China. That means an increase in food stamps and unemployment insurance rather than a tax rebate.

In answer to the riddle that forms the title of this post, a stimulus package is not a stimulus package when it takes place too late to have the desired effect, won’t provide a great deal of stimulus to the domestic economy, and has significant adverse effects. What’s being proposed isn’t a stimulus package, it’s a reelection insurance package and as such will have no difficulty in passing the Congress and being signed into law to secure the futures of incumbents everywhere. And isn’t that what’s important?

The Economists Speak

I’m not alone in my skepticism.

Angry Bear
Chris Edwards
Arnold Kling
Paul Krugman
Greg Mankiw
Andrew Samwick
Mark Thoma

They all think the stimulus is ill-conceived.


The Wall Street Journal article on the stimulus package has a good summary of its provisions and some telling quotes from the managers of a few companies:

Some company chiefs warned a stimulus could only go so far in propping up the economy. “Our particular business is tied to the auto industry, and if cars aren’t selling [the stimulus is] probably not going to get us to go out and buy a new machine,” said Kim W. Beck, chief executive of Automatic Feed Co., a Napoleon, Ohio, maker of presses used to stamp out car bumpers and other metal pieces.

Mr. Beck said he still has no plans to buy any machines this year. If he was on the fence about a purchase, “then you might be influenced,” he said.

Dean Garritson shares that conservative view. As president of Green River Cabins — a Campobello, S.C., maker of log homes used mostly as vacation getaways — he is planning to buy some equipment this year, including a new overhead crane for his factory. But a much bigger expansion plan is staying on the shelf. His business is strong, he said, but mainly because three regional competitors have gone out of business in the wake of the housing bust.

“I would never go off and do dumb stuff like dramatically increase capacity of my plant when I don’t have the orders,” he said.

4 comments… add one
  • Short of an actual depression, is there ever a good time for a stimulus package? Shouldn’t we set policies that will be effective long-term, and only adjust those when it’s clear there’s a better way of doing things, rather in repsonse to this or that month’s fluctuation?

    (And I’m seriously asking those questions, they aren’t merely rhetorical. I suspect that that the answers are “No” and “Yes”, but I’m certainly willing for someone to convince me otherwise.)

  • Generally speaking, I think you’re right but we’re dealing with more than a month’s fluctuations at this point. And sometime I really need to write that post on how technology supported by laws has given a leg up to owners of assets.

  • [B]ut we’re dealing with more than a month’s fluctuations at this point.

    Are we really at this point? I mean broadly speaking? Q2 (real) GDP growth was 3.8%, and Q3 was a blistering 4.9%. Unemployment has recently “spiked” to 5.0% in December, but that’s still pretty low. The financial markets are getting hosed tight now, but that seems to be a consequence of both institutions and individuals making bad bets in the real estate market. I don’t see how what’s happening is really worth panicking about. (This is not to say that I don’t understand that the politicians are merely trying to buy votes with borrowed money. That’s a time-honored(?) tradition.)

    Of course, there ARE big worries (certain trade deficits, budget deficits, national liability over promised entitlements, etc.), but I guess its too much to expect politicians to actually respon to the tough issues, especially in a Presidential election year. (Sorry, I’ve been feeling extra cynical lately. I’ll try to hold myself to normal levels of cynicism future comments.)

  • You know the saying, “There’s no such thing as a free lunch?” Well, you and I are paying for lunch.

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