Political return on investment

Here are some of my views on the economic stimulus package. There are three main parts to this issue: the core issues, inflation, and politics.

The aim of the short term stimulus is to get people to spend more. Consumption is down dramatically, i.e. the market for things that are produced is down. The question is, how do we best get people to spend money? Should the government spend money on contracts which get companies to hire more people and make CEOs richer? Or should the government give everyone a couple of thousand dollars? Which method would cause inflation to increase faster?

Is consumer spending really the core of the problem? Why are people spending less? Do they have less money, less credit, less confidence about the future? Contrast today with the Monetary Policy Report submitted to the Congress on February 11, 2004, "Uncertainty in financial markets had declined, and rising consumer confidence and a wave of mortgage refinancing appeared to be supporting consumer spending." If consumer spending is the problem, then the deeper problems are uncertainty in financial markets and the crash in the value of equities and real estate. These are the issues that need to be addressed

Returning back to the question of inflation, is there inflationary slack in a depressed economy? Normally giving everyone money would simply drive up the price of everything, but if supply exceeds demand, retailers would be happy to get rid of their excess inventory without raising prices much. But after they spend their money, would consumers continue to spend? Would the core problems continue to persist?

What about the politics of government spending? The current bill is widely acknowledged to be loaded with special interest spending. In fact, the political return on investment for this crisis opportunity is far too much to be passed up. Never before in history has a political party had the opportunity to spend so much money to promote its interests. Would it be possible to forego this opportunity - the nation is crying for leadership, something must be done, and the precedent for spending is already established.

In short, my view is that the government spending option is mostly political and will be much less effective than a tax rebate along with serious financial market reform.