Confounding the Stimulus Package

by Joshua H. Liberatore

When asked about his strategy for improving the moribund U.S. economy, President Bush keeps reminding us about the potential gains from the recent stimulus package, which needs to run its course before we can determine with confidence whether it worked or not. The “stimulus package” is a political phrase for a $600 tax rebate, which was intended to boost retail sales and fuel economic growth (recovery) by trickling up to all the right places, infusing the very machinery of our economic infrastructure with a spark of capital. I’m not an economist, and Economics 101 at the University of Michigan (lecture hall: 500 strong) didn’t furnish me with the financial wherewithal to calculate how an input of $600 from each tax-paying American consumer might multiply and diversify across an economy as enormous and complicated as ours. But in my layman’s understanding, the figure of $600 seemed peculiar in many different ways.

    My first instinct was to contemplate what an average consumer could do with $600. By the way, my musing here is completely theoretical. Because I was working overseas during the tax year for which the rebate was intended, I could not claim the minimum $3000 taxable income required to qualify. Too bad for me, since after all, $600 can be stretched out quite far in Thailand where I was living. It pays for a week-long trip to nearby Lao (for two!), if done modestly. Don’t worry: we took the trip anyway. But back to our purpose; let’s consider, for a moment, possible purchases in the intended stateside market: a month’s worth of gas, a new bicycle, a root canal, a flat screen TV, a weekend trip to New York City (staying with friends)?

    The possibilities are indeed both exciting and varied. Would any of these things, when multiplied by the millions of Americans who, Bush reminds us, now have some “extra cash in their wallets,” provide the desired “stimulus”? Let’s take the TV, for example. If everybody bought TVs, the Best Buys and Circuit Citys (even humble Radio Shacks) of the world would enjoy quite the field day, wouldn’t they? Just imagine: The shelves are cleared quickly and need to be restocked (retail sales boost); a need arises for part-time help, so extra stockers are brought in (job creation?); the warehouses and regional distribution centers are madhouses (economies of scale); a new fleet of trucks (or subcontracted trucking companies) is marshaled, and so much more gas purchased (industry revenues peak); suppliers, parts manufacturers, factories in South Korea, China, Taiwan, and Mexico all feel the surge, the handful of Japanese companies behind them flush with windfall profits (global economic implications); and back to investors, shareholders, and dividend recipients . . . even more “cash in the wallet” (happy bull market) At each stage of the transaction, the individual input might create a modest but palpable bubble of temporary bliss.

    And then what? More Americans are watching the evening news on 36 inches of crisp, exquisitely proportioned, moving-image machines. Where is the long-term boon? We could repeat this mental exercise for any number of ordinary consumer-ready products valued at $600 with amusing results (the flurry of root canals presents by far the most titillating picture), all temporary in impact. Is our economy so fragile that it can be stimulated with such an oddly round yet paltry sum when multiplied by the millions who were and are expected to inject it directly into the retail matrix of perpetual consumption?

    In other words, the rhetoric has suggested that one was expected to spend the extra money in one’s wallet all but immediately. Our government was explicitly advocating a one-, or two- or six-item spending spree, individual gratification for the good of the whole, the great American fallback toward collective fiscal self-help. Naturally, when contemplated further, this thread of thought leads to some more worrisome notions. Might not such a state-sanctioned receive-and-spend mentality be symptomatic of some much larger, more deleterious policy choices on the macroeconomic scale? Notice that nobody was explicitly encouraged simply to save the money for the proverbial rainy day, invest it in a nine-month certificate of deposit, even at the pitiably low rates of interest currently available. Nobody said, Tuck that $600 away for your child’s (or grandchild’s) college education or your own retirement. Nobody suggested using it as a down payment on a solar panel or wind turbine that might pay for itself in savings within a handful of years. In short, nobody offered a long-term goal toward which the money might be used – less satisfyingly perhaps but more effectively in the broad scope.

    I find that specific type of myopia extremely disheartening but all too predictable; after all, it characterizes the very mentality our government uses to plan and justify its own spending patterns. After all, can’t we just always borrow more money? Our credit is good, isn’t it? In a recent editorial, New York Times columnist Thomas Friedman treated the Bush administration’s double failure to respond to policy crises constructively: “After 9/11, Bus had the chance to summon the country to a great nation-building project focused on breaking our addiction to oil. Instead, he told us to go shopping. After gasoline prices hit $4.11 last week, he had the chance to summon the country to a great nation-building project focused on clean energy. Instead, he told us to go drilling” (July 20, 2008). Friedman has studied the Chinese example closely; he knows that gas won’t be getting any cheaper and that our economy won’t get any stronger through stop-gap measures alone.

    How fitting that our immediate response to an economic downturn or a period of less than spectacular growth in wealth is to borrow – that’s what a tax rebate is after all, a taxpayer-financed loan to taxpayers – a nominal sum and spend it immediately on something tangible, serviceable, and ultimately, disposable. And we call it generosity. And we call it Republican virtue. How long can we delude ourselves, and let our government delude us, in this way?

    Let’s shift the terms now and imagine a different purview, one perhaps all too naïve for this era. I remind you that I am not an economist, but I’m tempted to wonder what would happen to that same $600 if applied directly (through a government subsidy) to every American student enrolled in a public school. Ignoring the gross inefficiency and spendthrift reputation of our public school systems for a moment, if that money could be tracked and accounted for, imagine the impact it might have when filtered through underfunded institutions in rural and inner-city America. According the most recent U.S. Census data, American public schools serve just under 50 million students, which when multiplied by $600, gives us a lump infusion of almost 30 billion dollars. By comparison, total budget outlays from the U.S. Department of Education in 2007 amounted to just 66 billion dollars, just over double the amount of money represented by our imaginary cash infusion. Granted, the Education budget is intended for a lot of different programs, ranging from special education services to college loan financing. Better to look at our national average for spending per public school student, $8,700 in FY 2005, most of which comes from state and local tax revenues, not the Federal budget. In other words, our little bonus would augment that modest per student figure by nearly 7 percent, a sizable increase.

    But that calculation is a little abstract. Instead, let’s think of schools as more typical American consumers that spend money when they have money. Consider what an individual school might purchase with this “extra cash.” For one school, it might mean a complete overhaul of outdated, ragged textbooks; for another, a new computer lab or a better, more healthful cafeteria. Some schools would decide they could best use this money to hire an additional teacher (or five) to reduce their student to teacher ratio and increase contact exposure, shrink its class sizes, offer additional subjects, or expand arts programs or supplemental tutoring services.

    Nobody, of course, could see or measure the economic impact of these investment choices right away, but ten to fifteen years down the road, the net economic gain might be quite significant, observable in a better-qualified workforce, a more thoroughly educated population, a responsible “first” world education system, and enhanced competitiveness with our increasingly better-educated Chinese and Indian counterparts and our long better-educated European rivals. Imagine what just $600 could do, when invested properly, in a long-term growth package that provides more than just a stimulus – the word itself smacks of short-term gain, an indulgent purchase, a profligate quick-fix – but rather a sustainable model for genuine improvement and prosperity.

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