Author: Chris Best
On Tuesday, Feb. 17, President Obama signed the $787 billion stimulus package into law at the Denver Museum of Nature & Science. The bill, an indefinite mish-mash of spending and tax relief, is not the cornerstone for economic recovery in the United States claimed by the Obama administration.
“The fundamentals of the economy are strong,” said a to-be-defeated Presidential candidate. That candidate was Senator John McCain. And, whether the Democratic Party knows it or not, they are subscribing to this fallacy.
John McCain clarified that, although the economy was in serious danger due to the collapse of the financial market and the Wall Street meltdown, the economy was/is a viable economy.
Much has changed in the subsequent months. The economy has slipped deeper into the recession as the automakers ask for repeated bailouts, the value of homes continues to drop, retail companies face mounting losses and more banks announce insolvency and instability.
In response to this crisis, the American people were presented with the supposed answer to this financial meltdown: the Obama Stimulus (cue the trumpets and angels). The plan aims to create 3.5 million jobs in the coming years while restoring market confidence, boosting energy independence, improving primary education, making post-secondary education more accessible, funding innovation in health care technology, cleaning up drinking water, fixing roads, building bridges, and helping Jesus come back (okay, I made the last one up).
Seems like a pretty perfect fix.
Econonics 101 teaches us that the government can bring the economy back to full employment and desired gross domestic product (GDP) by manipulating “Aggregate Demand.” Because government spending is a component of Aggregate Demand, increased spending shifts Aggregate Demand up. This will cause GDP to go back to long run equilibrium, lowering unemployment and creating greater economic wellbeing.
This is a seemingly perfect excuse for Obama to spend on many of the top items on his agenda. By funding green jobs, improved education, and electronic health care records, Obama will also be improving the economy. As White House Chief of Staff Rahm Emmanuel so perfectly put it, “You never want a serious crisis to go to waste.”However, here’s where this McKeynesian thought goes wrong. For a stimulus to be successful, fiscal policy must be clearly focused on increasing economic well-being. The bill must be analyzed for economic effect in every aspect. Government spending does not boost the economy indiscriminately.
Items like infrastructure and education can and will boost economic well-being, but only in the long run. Meanwhile, items like cleaner drinking water, green energy, defense spending, unemployment insurance, and low-income tax cuts are not creating a better-equipped economy.
The stimulus needs to pinpoint the particular problems and try to fix them. The cause of the recession was America’s reliance on borrowing foreign capital and spending money on consumer products against the value of its housing market. The artificial rise in housing prices was a predictable result of lowered interest rates from the Federal Reserve. Once the housing bubble burst, Americans found themselves unable to pay their debts and unable to continue buying goods.
This recession was a clear indicator that an economy based on overconsumption (70 percent of GDP), enormous trade deficits (approximately $650 billion in 2008) and constant borrowing cannot and will not work.
Any stimulus must discourage these destructive habits. Right now, the goals of the government and the Federal Reserve are to restore market confidence, free up the lending market, stabilize housing prices, and get people spending money again. In plain English: the government is counting on borrowing and spending to carry the economy once again.
Albert Einstein once said, “The definition of insanity is doing the same thing over and over and expecting different results.”
Encouraging Americans to buy more things and take out more credit on the government’s tab is not helpful; in fact, it could be downright harmful. Some might even say it’s insane.
Chris Best is a first-year Economics major. He can be reached at best@oxy.edu.
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