Economy in Decline (part 2 of a 3 part series)

Stimulus legislation comes in at $789 billion.

As the stimulus legislation is formalized into law, the public is still reeling at the price tag.  

Congress has committed $789 billion in new spending and tax relief, as well as the $700 billion already committed in October of 2008 to support failing banking institutions and an additional $2 trillion dollars, proposed by Treasury Secretary, Tim Geithner, to support financial and real estate sector recovery.

Economists from government, academia and business, whose trade is big numbers and abstract concepts, have been at the forefront of analyzing this crisis.  There is fervent activity among economists across the political spectrum and disagreement as to what should be done to solve problems that individually and collectively are not exactly like those faced, studied and dealt with in the past.

A Major Government Effort

A significant number of leading economists agree that stimulation of the economy, as it slows, will help counter the worst effects of its decline. 

This is more than a political concern for the personal hardships of unemployment, foreclosure, bankruptcy and lost opportunity that recessions engender.  The overall cost to the nation in growth, productivity and economic leadership is also significant.

With an economy estimated to lose trillions of dollars in activity because of the credit crisis and recession, only a massive stimulus law could have substantial impact.

Painted with a broad brush, the stimulus bill gives money to the pubic in the form of tax cuts ($282 billion – $400 per individual, $800 per family or $250 in Veterans and Social Security benefits) and increased unemployment benefits.  It increases public spending ($507 billion) on a wide variety of programs including infrastructure, green technology, support for cancer research and education.  It also provides emergency funding to states ($87 billion) to support state Medicaid funding.  

The hope is that this money will keep people employed, spending and receiving services until the worst of the recession is over and private business activity resumes at a level sufficient to increase employment, spending and tax revenue.

Doubts and Fears

The bill is only a part of the government’s efforts to remedy the economic decline, and yes, the price tag is staggering. 

Despite fears about the economic decline, many Americans have expressed concern and outrage at the scale of public spending, fearing that the money will be wasted and that increasing the deficit will pass the buck for fiscal responsibility to our children and grandchildren.  

Some accept the tax cuts as needed for stimulation of the economy, preferring money in private hands to government spending.  The abrupt increase in public spending also raises fears of inflation in the long run, even as deflation from falling prices and incomes is the current worry.

Among supporters, there is the belief that money lost from the private economy should be made up at least in part through public and private spending, but also that public services have been shortchanged and commitments to public education, green initiatives and infrastructure will improve the nation and lives of citizens.

Costs and Benefits

The real aim of the legislation is to stabilize the economy by supporting business activity through the most dangerous phase of the slowdown.  President Barack Obama has spoken of keeping the recession from spiraling downward as more layoffs cause more foreclosures and drops in personal and business spending, eventually leading to more businesses closing their doors and a snowball effect of economic contraction.

An alternative to this action is to accept dramatic decreases in economic activity with resulting unemployment, business closures and cuts in government services and wait for the eventual economic recovery.  

While this approach would risk less in the way of upfront public spending, current leaders feel that to do nothing or only cut taxes, when the risk of long-term economic decline is significant, would be to repeat the mistakes that led to the Great Depression, which lasted more than a decade.  Other proposals, such as one for a short-term capital gain tax waiver to stimulate reinvestment and market confidence were ignored in this bill, but remain available to a government firmly committed to fighting large-scale economic collapse moving forward.

From this perspective, the aggressive action taken by Federal Reserve Chairman Ben Bernanke, Treasury Secretaries Henry Paulson and Geithner, President Obama and two Congresses seem promising.   

The government is being responsive, bold and aggressive.  Now, whether it will work, remains for the future to tell.