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The Student News Site of Stony Brook University

The Statesman

The Student News Site of Stony Brook University

The Statesman


    Statesman Readers Don’t Understand the Stimulus

    In a recent online poll, we asked Statesman readers to predict the effectiveness of the U.S. government’s fiscal stimulus plans. The outcome of that poll would indicate that many of our readers are mistaken about how so-called stimulus will actually affect the economy. While there is still plenty of debate among economists, the most obvious and logical outcome of fiscal stimulus — that there may be short term growth but stagnation in the long term — was the option with the least number of votes in our poll. At least, this outcome is obvious to anyone who is skeptical of the mainstream’s disregard of the long term effects of central economic planning.

    Although the poll was not scientific and can’t tell us anything quantitative about the opinions of our readership or Americans at large, it does echo a trend on the national scale that, in these times of economic crisis, most of us don’t understand the policy prescriptions our politicians are writing for the country.

    The poll itself asked, “Do you think fiscal stimulus will help the economy recover?” and the following four possible options could be selected: (n=116) “Yes, for long and short term growth” (23 percent), “Maybe for short term, but not long term growth” (11 percent), “It won’t help right away, but there will be long term growth” (39 percent), “No, nothing government does can save us” (27 percent).

    Most people believed that the stimulus would create long term growth, probably because in our current condition short term growth is hard to imagine. In addition, a large chunk of the stimulus package is targeted towards infrastructure investments that, while causing short term employment, can only hope to provide long term economic growth by generating economic activity over the long term. 27 percent of readers polled had a more realistic view of our government’s ability to create economic growth, but are perhaps naive to the government’s ability to create apparent short term growth. 23 percent of our more optimistic readers predict that our politicians are correct in pursuing stimulus for all future economic growth but, as I will explain, this trust is probably misplaced.

    Monetary and fiscal policy pursued by government is based on imperfect information and, so, they themselves are largely imperfect, as evidence by the continued existence of boom-bust cycles, an economic phenomenon counter-cyclical monetary policy was supposed to prevent. However, far from eliminating business cycles, unstable monetary policies, which inaccurately predicts the market’s ability to handle sector growth, feeds capital to unsustainable investments. This is, in part, how the housing bubble formed in the first place, leading to the subsequent credit crunch.

    It should come as no surprise that using large scale monetary and fiscal policies to attempt to smooth out short term trends in the business cycle also has long term repercussions. In essence, the housing bubble formed by executive and legislative polices of extending credit to borrowers who would not be able pay their debts, later on. Today, the government’s response, sponsored largely by Democrats, is to try to stop the bubble from crashing, by supplying more credit, bailing out the financials who granted sub-prime mortgages and preventing home foreclosures. This is being done by increasing the deficit.

    Just like in one’s personal finances, taking out a loan can help support short term economic well-being. However, there comes a time when loans must be paid back. If savings were generated from income to pay back the loan, there are no problems. However, taking out yet another loan to pay back the first is just delaying the problem. Eventually, loans will have to be paid back with real money.

    Unless you’re the government, that is. Fiscal ”stimulus” helps return to bubble conditions by ”taking out” more loans. So, the economy will appear to grow on the short term. However, the debt generated will negate any improved economic growth in the future, particularly because most stimulus causes the bubble to reinflate in the same sectors that failed the first time, or possibly new unsustainable sectors. The other option, besides actually paying debts, is to print money. However, this leads to inflation, which push prices up and further discourages savings while devaluing the power of the currency and national economy.

    So while fiscal stimulus can lead to short term, apparent growth, its ability to provide long term economic growth is limited, and is a problem of how to coordinate new production to sustainable demand, an impossible feat.

    This fact is dangerous for economic policy-makers. Short term stabilization will convince politicians that fiscal stimulus was right, convincing them to pursue similar policies in the future. When stimulus fails in the long term, and bubble conditions return, the argument is made that simply not enough money was spent to stimulate the economy, and more spending is needed. Therefore, unless the role of government in the economy is truly understood, the situation feedbacks on itself and economic health is continually eroded.

    Overreacting to economics shocks only serves to increase the virulence and frequency of economic bubbles, creating conditions which makes recovery even more difficult, in spite of government’s ”rescue” plans.

    Even if ”doing nothing” is not an acceptable role for government during recessions — which is debatable — responding by enacting huge deficit spending is certainly an overreaction that will make us worse off.

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