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!!!!!

16 comments:

Tim Diette said...

I am in attendance. I want my new TV! Oh wait, that will increase C but increase IM by almost the same amount....so much for moving AD

Anonymous said...

Well I think that if we reduced the amount of cheep plastic goods we buy from China (EX-IM) which happen to have lead and date rape drugs in them we might be able to get GDP up. Also, I have a question about what happens when interest rates go up in an economy with negative savings?

Sean Keneipp

Catherine Long said...

I agree...there are better ways to spent $57 bil than giving it away to HH to do whatever they want with it...I'm all for providing health insurance.

john ferraro said...

I think the government needs to start looking into some long term answers to the current economic crisis. I dont think these tax breaks will do anything to combat the mortgage crisis, national debt, inflation, or value of the dollar in the long term. It will merely provide small short term benefits that will fade quickly.

Drew Moxon said...

The interesting thing is the timing of this stimulus package. It will hit households from late spring well into the summer. This is about the same time-frame that most analysts are predicting the market will bottom out and start going back up (cyclically speaking). Now if the market strength increases as a whole (mortgage market notwithstanding), why does this package need to happen at all? As Dr. Casey pointed out in class, GDP numbers aren't everything...

Anonymous said...

It seems the article has good ideas. Why not spend that $57 million on alternative fuels like solar panels, hybrid cars, or wind turbines, so that people will be saving $300 -$1200 a month on energy costs which will allow them to in turn spend more money around the economy and cause our economy to flourish, all the while saving our planet.
Jonathan Forte

Steven Olszanowski said...

Seeing how the government has already wasted so much of our money, they may really have no idea what else to waste it on. So, they're giving it away. They're excuse being it will raise C.

Daniel Trevor said...

I completely agree that we should use this money for more long term goals like alternative energies. However, politicians are in a constant battle of trying to get themselves reelected and this quick payoff will certainly translate into votes. In an election year most politicians are only worried about short term benefits that will help them keep their jobs, rather than the long term goals that we really need.

Ross Davidson said...

I like the idea of investing that money in newer, better, more efficient infrastructure. Kind of a new-deal type scenario. Different people and firms should be hired to update things like bridges, roads, and water treatment which will stimulate the economy now and provide serices for communities into the future.

Andrew Gibbs said...

I don't pretend to understand economic politics, but I do know that the majority of Americans love to spend what they have and more. So, I believe that the money distributed will be pumped back into the market. I do have questions about the whole situation though. Was the cutting of the interest rate by the Fed an attempt to make sure Americans would spend this rebate instead of saving? And what will happen to the economy if Americans do save the money instead of spending?

MGraham said...

I agree with you. This is like putting a small bandaid on a large wound. I agree with John's comment. The government shouldn't be bailing out the mortgage industry. They created the problem they should solve it.

Jonathan Ziemba said...

I believe that any money should be used in ACTUALLY making changes like getting all the useless, trashed, and rediculous gas-consuming SUV's off the road and replaced with electric cars or anything other than fuel. Its sad that weve been talking about this for so long and noone does anything about it even tho we have plenty of money available. I agree that campaigns use way too much money and all of these efforts need to be directed at making Energy changes

Darrel Bright said...

The money should go to technological development. But hey, I'll take my $750 check to Wal-mart and buy Chinese goods like a good American.

Lynnise said...

While the concept is nice, I would much rather see the out-source of services decrease. However, I would not mind have a check and sticking it into my IRA accounts!!

chris mobley said...

I agree that the gov is wasting our money or at least spending it in places where the cost-benefit ratio is too low. I also am all for health insurance. if these funds could be redirected or spent elsewhere, there could be a potential rise in our gdp.

lauren fields said...

i dont want to be cynical when i ask this, i actually am legitimately curious. does the president really do things that he may know, or his advisors may know will harm us in the end, just to make us think that he's listening to us and hearing our complaints? if the white house knows the money could be better served being channelled elsewhere, would they still give it back to us simply to hush up the naysayers? because if you break it donw in economic terms, it seems like its very simple to understand there are other solutions that could be more prosperous...so im asking, do we actually get what the general public asks for even if the feds know better? or do they even?