Bajtelsmit Column: Will the Stimulus Plan Stimulate?

Note to Editors: Vickie Bajtelsmit is a finance professor in the Colorado State University College of Business and the author of three personal finance books.

President Obama’s plan for stimulating the U.S. economy has been the subject of a lot of discussion, both positive and negative, over the last two weeks. If you listen to political talk shows, you’re surely confused by now.  

When the plan was first announced, opinion polls showed overwhelming popular support. Of course, most people were only aware of the broad brush strokes when they gave those opinions. The bill passed the House with flying colors, but the closer vote in the Senate has lead to some healthy debate about the specifics.

Some of the criticisms I’ve heard launched against the stimulus plan include "It’s nothing but a spending bill." "The bill is full of pork." "There aren’t enough tax cuts to be a stimulus." And my personal favorite – as if we haven’t been doing this for the last 8 years – "We’re mortgaging our children’s future." Not surprisingly, pollsters now report significant declines in public confidence.

This is obviously a complicated issue and there is no single silver bullet that will cancel the recession. There is continued disagreement on the advisability of spending versus tax cutting, so I thought I’d throw in my two cents.

Think of this as a short lesson in economics. My apologies to my economist friends – this is necessarily an oversimplified version of a very complicated situation.

First, something we all know – our country is in recession. Although experts can disagree on the precise definition of a recession, it’s generally characterized by sustained declines in business activity and employment, usually measured by gross domestic product (GDP).

GDP is calculated by adding up household spending, business spending, government spending, and net exports for a given period of time. Net exports is the value of exported goods minus imported goods – for the US, this is not a source of gain in GDP because we love cheap foreign goods. So in order to turn around the economy, a stimulus plan has to increase one or more of the spending categories without offsetting decreases in the others.

Individual household spending is clearly down due to increased unemployment and low consumer confidence. Business spending is down because individuals aren’t buying their products and services. So it isn’t a big stretch to see that government spending is the only source of spending in the short run.

So for all of those naysayers arguing that "spending isn’t stimulus," I say hogwash. The only possible kind of stimulus is spending. I can understand debating whether it should be government spending directly on goods and services or government spending through direct cash payments or government spending through tax cuts without cutting other government programs. But arguing that it shouldn’t be government spending is just a lot of political chest thumping.

The real issues are whether the spending will occur soon and whether it can result in sustainable economic benefit. Government spending must eventually result in individuals and businesses spending as well.  

For example, extension of unemployment benefits and direct payments of tax rebates to individuals pump money directly into the economy. Lower and middle income households can be expected to use that cash to buy goods and services, but probably only necessities like food and household staples. Some businesses will benefit in the short run, it’s not a sustainable effect.

Tax cuts to businesses are argued to have long run impacts, increasing profitability and global competitiveness, but results in the past have been inconclusive. And it’s doubtful these measures will have any immediate impact.

Similarly, government spending on public works like roads won’t solve our short term issues. However, in anticipation of future federal dollars, it seems reasonable that state governments and contractors might shift resources around to lessen job cuts and other the negative recession effects.

So what are we left with? The stimulus plan is not a silver bullet, but instead a shotgun full of pellets. The hope is that a little bit here and there, and a large dose of consumer confidence, will provide the stimulus we need.