Thursday, January 24, 2008
What to do with $57 billion?
Today's NYTimes reports a tentative deal on a fiscal stimulus package. Apparently, the Federal government is going to cut every family in America a check for between $300 and $1,200. There are approximately 77 million households and let's assume we split the difference on those payments for an average check of $750. Now do the math - that's over 57 billion dollars. The hope is that Americans will rush out and purchase new goods and services. In other words - pump up the aggregate demand curve with a boost to C (recall: Y = C+I+G+X-M). Now recall that any attempt to boost aggregate demand in the short run is inflationary in the long run. So, instead of attempting to boost C, why not go after I (Investment). The government could actually spend the 57 billion on (1) alternative energy, (2) fixing bridges, (3) insuring all Americans, so firms don't have to!!! (4) fixing schools, or (5) alternative energy - oops - that was number one. Or, if you don't like government spending - we could provide 57 billion in tax breaks for private firms that do all of the above. If you target Investment - you get the short run demand side stimulus followed by long run productivity gains. So let's forget going to the mall and start pushing out that Aggregate Supply Curve. Anyone, Anyone, Buehler, Buehler!!!!!