“Economic Stimulus” Won’t Fix Long-Term Economy
February 11, 2008 by Miranda Marquit
Filed under Finance
One of the main things to keep in mind about investing, and even the economy, is that the whole thing is cyclical. There will be downs as well as ups. The idea is to arrange your personal finances — and your investment plan — in such a way that you can weather the down cycles and do well in the good times.
Unfortunately, we’ve hit an era in the US where we seem to believe that “economic stimulus” should be a constant. There seems to be a fear in letting the stock market correct itself and even plunge. Instead, we seem to think that the stock market should always be up, and that rapid economic growth should always be happening.
This is why Congress has just passed an economic stimulus package. Unfortunately, in the long run, it won’t actually solve any problems. All of the “quick fixes” from Fed rate cuts to tax rebates to encouraging increased spending (and by implication increased debt) all serve to make the economy more unstable in the long run, not less.
Down cycles are part of a healthy economy. They help us re-evaluate what’s important, and they encourage citizens and institutions to engage in financial practices that are fundamentally better. Constant “economic stimulus” does the opposite, giving us a false sense of “confidence” that lasts only until the next crisis.
I doubt this “stimulus” package will even benefit the short-term economy. Most people are probably going to got out and purchase those things that they have not been able to afford in the past, most likely high-end electronics. The problem with this is that most of the money spent will go to foreign manufacturers. So this means that most of the money will just bypass our economy and stimulate the economies of nations that are already causing ours to fall.
I’m an independent but everyone should see through this ’stimulus package’. It’s simply to try to push the economic woes beyond the election. Also interesting is that I read 30% of the people getting the cash don’t pay any taxes. Nice redistribution of wealth, huh?
You both make good points.
Juraj: It is worth noting that in the short-term, the products bought (you correctly state that they are likely to be consumer electronics) will help the stores they are bought at. This is where the economic stimulus comes from. Also, it is worth noting that these high-end consumer products are usually bought with credit. The tax rebate will only provide a down payment, and the rest is likely to be financed, further providing short-term stimulus.
Your point that they will likely only increase our trade deficit is another key concern, and one that is connected to the long-term issues of the spending habits we have.
Douglas: Our tax system is really a rather complex wealth redistribution program. Why should rebates be any different? An complete tax system overhaul is needed…
Heheheh, It won’t happen, but my fantasy is that a majority of recipients SAVE their rebates or pay down debt. The politicains would freak, the curtain would open and people would get a glimpse of the puppet master. Hoo-rah! Wouldn’t that be a kick?
It would be nice if that happened. It would be better in terms of personal finances, even if it didn’t “stimulate” the economy.
And it is a good sign that most plan to pay down debt. The real test, though, comes when it actually arrives and people are called on to put their good principles into practice.
The reason for this “fix” is that it’s an election year. It’s all about perception, so Miki’s comment about the “puppetmaster” is dead on.
What everyone needs to do (and won’t do) is to settle down, tighten their belts, and get to work thinking long-term.
I think you and Miki are right about all this about it being an election year. And since our society is interested in instant gratification now, politicians are ready to give it to us in this form.
It would be good if long-term planning came to the fore.
Hahahahaha This country can’t eve SPELL ‘long term’, not Wall Street, nor business and certainly not politicians, so why expect it of individuals?
Miki’s suggestion of using the “stimulus” windfall to pay down debt is an excellent idea. Consider: if you were paying upwards of 12% on your debt (subprime credit cards pay 3 to 5 times of normal interest), you would in effect be earning that much on your money. I don’t know of any investment that could earn that much.
Oh, paying off debt would definitely be a good use of the money. Unfortunately, despite good intentions to do so, most people end up spending it. Or — even worse — using it as a down payment on even more debt. That’s what happened a few years ago with the Bush Administration and Congress passed that tax rebate. You can see how much it helped in the long run. Since we’re in worse shape now, and the tax rebate is even bigger…
Oh Miranda, How can you write about creating wealth and not understand the basics of doing it in the US? The trick here is to run up the largest deficit in history and then provide a bonus to those who rely on you.
See, that isn’t so difficult to understand, is it? :)