Sunday, February 15, 2009

The 2009 Stimulus Package: The Good, Bad and Ugly

Well it is over. Tomorrow President Obama will sign the $787 billion stimulus package. Of course the package has some positive, bad and downright horrible elements.

First the good. This package combined with record low interest rates, and a fix for the banking sector will push the U.S. economy into positive growth territory. In my judgment, this will occur by the final quarter of 2009. This will be manifested in advance by leveling of unemployment rates and significant upturns in yields on 10-year U.S. Treasury bonds.

Next the bad. The Congressional Budget Office has estimated that this year’s federal deficit will exceed $1.2 trillion. Spending from the Stimulus package combined with TARP 2 funding will likely push the deficit to $2 trillion. This will elevate the federal debt to roughly $13 trillion allowing baby boomers such as me and President Obama to burden younger generations with higher interest rates, excessive inflation and/or burdensome taxes.

Finally the ugly. Included in the Stimulus Bill is a requirement that spending emanating from the package be focused on American companies. I have written earlier on the consequences of such a requirement.

Apparently members of Congress, the Senate and the Obama Administration are prepared to use most of the history of the Great Depression to advance this year’s Stimulus Package. They have skillfully avoided discussing the Smoot-Hawley Bill which was passed in 1930 and was an important factor contributing to the depth and length of the Great Depression. Just as the 1930 bill, this year’s invites retaliation from some our significant trading partners such as China. This will have negative ramifications extending well beyond Mr. Obama’s tenure in the White House.

Ernie Goss


Anonymous said...

More spending, which is the entire point of this stimulus package, is not going to get us out of this mess, because spending itself is what got us into it. Spending less than we earn and saving the rest is what we need. Not just us, ordinary citizens, but also the state. At times of economic growth the state is supposed to save money so that when the downturn comes, it doesn't have to go into debts itself. But I guess this is true only in economy text books these days.

Anonymous said...

Remember the paradox of thrift. That savings actually reduces demand.

Savings isn't quite the answer people think it to be. We need to spend as a collective group to patch the $3 trillion dollar hole we've let grow through the housing bubble and the slump in business and consumer demand. Keynsian calls for the government to be the buyer of last resort.