Economic Stimulus Concerns

By Chuck Fisher
Staff Writer

I don’t know a lot about fire fighting (I do know a great deal more about fire-lighting…). What I do know is that water is used to quench fires, so as I sit back and watch our economy go down in flames, my first reaction is to want to dump buckets of water (or anvils) on bankers’ and stockbrokers’ heads. This same reaction has also been shared by the two presidents and two congresses. Buckets of green-backed H2O have been dumped onto the system in hopes of stopping the spread of the fire and putting the thing out. $700 billion to banks and $17 billion to Detroit, enough money to pay for one student to attend school here for about 23 million years! Has it worked? So far the fire is still burning and spreading, so President Obama and Congress have decided to hit this thing with the mother of all fire hoses: The American Recovery and Reinvestment Act of 2009 (ARRA). It entails pumping large amounts of money into various sectors of our economy in hopes of recharging them and staving off more trouble. So will a $787 billion dollar fire hose save the country, or will it be a waste of another 23 million years worth of Marywood tuition? That’s the trillion dollar question.

So what’s the theory behind spending this gargantuan amount of money? In order to understand how to put out this billion alarm blaze, we need a brief understanding of why it’s burning to begin with. It comes down to “we the people.” We’re out of work! People are losing jobs and have been losing jobs continuously for the last few months. This job loss was triggered by the economic downturn which can be traced back to the subprime mortgage collapse (another Wood Word article’s worth of explanation). Suffice to say that Wall Street starting sinking. Banks began hording money and refusing to lend it for fear of it not being paid back. Lending and credit are essential in our modern world, but a wave of lost confidence prevented credit from being lent. $700 billion was launched into the system last September, hoping to boost confidence levels and get the banks to start loaning money again. Unfortunately, the amount of recovery from this package was negligible and credit still isn’t flowing.

Without flowing credit, it’s difficult for employers to get loans to make payroll and buy necessities for their businesses. Employers need to cut back expenses by laying off workers, go out of business, or both. As a consequence, businesses that aren’t floundering are having difficulties selling their products because everyone is trying to save money, afraid they’ll be out of work next. So companies that were in good shape begin taking a nosedive as well. With no one spending, the economy keeps getting worse with more people afraid to spend. With no spending, banks and stockbrokers get scared because no money is flowing so they’ll continue to hold up lending. It has become a vicious circle or a “positive feedback loop” (fancy scientific name) that keeps getting worse just because it’s getting worse. The ARRA is meant to break this cycle.

The ARRA is meant to jump-start the economy by providing funding to create new jobs and to provide more funding to social programs to help people who are having trouble weathering the downturn. It’s hoped that jobs will be created by funding public works projects, construction projects, green energy projects, education and healthcare, lowering business taxes, and spending on other projects that will give people employment. Furthermore, social programs like expanding health care and extending unemployment benefits are meant to help people who still can’t get work.

The idea is that if people are working again, they’ll also start spending again. People with more money and less fear will begin paying for goods and services which will in turn trickle down throughout the economy. For example, if the government gives me (pretend I’m a town–Charleston!) money to build a bridge over a river in my town, I will have to employ and pay construction workers. These workers will use that money to buy groceries, buy new clothes, and buy toys for Little Billy’s birthday next week. The grocery stores, department stores, and Frank’s Toy Emporium will in turn receive that money from the construction workers. They will have to pay their employees and buy new stock for their stores (Little Billy wants a Super Fighter GI Joe with Karate Chop Action and Laser Vision!). The money will flow through the system, get people to spend, and put people back to work. Granted this is a grossly oversimplified explanation but this is the basic idea behind it.

The ARRA has many critics because, after all, $787 billion dollars is an insanely large amount of money (enough to buy 2.5 million Ferraris). Detractors argue that the money will not necessarily stimulate the economy. They argue that people, still panicky, may not spend the money they receive, thus not getting money to flow through the system. They also argue that some of the money will be going to projects that won’t create any new jobs, such as spending $300 million to buy electric vehicles for government agencies and $1.1 billion to study the effectiveness of different medical treatments. Arguments have also been made that creating short term jobs isn’t the same as creating long term careers and that when the government money dries up we’ll be back where we started.

So will this government stimulus work? Economic “fires” are tricky buggers to put out. Water may put the fire out or it may just slosh it around and spread the flames. Quoting Dr. Fredrick Fagal of the Social Science Department, who helped me do research for this article, “For the sake of the country, I hope it works.”