They Diverted What?

Just two weeks ago my wife and I got our “Economic Stimulus Package” from the Federal government. It’s a whopping less than half a week’s total pay which will, in fact, not even cover the costs of our trip to Michigan later this week. I mean the gas, hotel bills, meals and car maintenance, here; the whole check does not represent even 5% of our total relocation costs. Still, having part of our travel expenses covered by a cheap political stunt is better than nothing, I suppose, and we will definitely be pumping back into the economy – paying for goods and services at gas stations, hotels, and roadside food stands. If there’s any left I plan to use the residue to purchase a snow blower once we arrive in East Lansing…

Have you gotten your “Economic Stimulus” check, otherwise known as a tax rebate, yet? Well, if not, you should probably check with any State, Federal or local agencies whom you owe money (at least if you haven’t been making your payments for a while). According to an article in USA Today about $2 billion of the rebates are being confiscated to pay child support, student loans, back taxes, and other things that the government thinks need the money more than you do. I’ll admit I have mixed feelings about this whole affair…

On the one hand, I don’t have much sympathy for deadbeat parents (we’ll be egalitarian here and include the tiny number of deadbeat mothers in with the vast majority of deadbeat dads) in the first place, and if you paid enough in taxes to qualify for one of these checks, you probably weren’t counting on it to survive anyway. I’m a bit more sympathetic to those who are defaulting on student loans and farm loans; the fact that some of these people have not been successful enough to repay the loans isn’t always their own fault, and in some cases I suspect that these folks need the money more than our government does. Especially since the whole $2 billion will only go to funding another two or three days in Iraq, anyway…

But there we come up against the big problem with this whole program. The country does, indeed, need some economic stimulus if we’re going to snap out of the current recession. It might seem as if one way to create more consumer spending is to just give money to people (and let them spend it), but somehow this never seems to work correctly; it didn’t earlier in the current administration, it didn’t during the Reagan years; in fact, it never has. This is because money pumped into the economy this way is only spent once, effectively: by the consumers who received it. If they spend it on the right products, it may have a small “ripple” effect, as retailers pay their distributors who pay manufacturers, but that’s as far as it is likely to go…

Suppose that instead, those same funds were spent on a Federal project to do any of the infrastructure development we desperately need in this country. For example, suppose we replace a few of those decaying highway bridges. The companies we hire to do the work have to pay their employees, their suppliers (people who make steel, concrete, paint and what not), and all of the fees, permits and insurance costs required. All of that spending results in additional spending, as suppliers pay their vendors, employees pay rent and buy consumer goods, and tax revenues are generated for cities and counties to support their own operations – not to mention what they might save on building new bridges…

This concept is called the “Multiplier Effect,” and is a common principle of macroeconomics. Depending on the conditions at the time, money injected into the economy in this fashion will generate between 2 and 5 times the impact of just giving money directly to the taxpayers (currently it’s about 4). It’s much more effective than a simple tax rebate in every sense except the political; politically the poor people see it as free money from the government and the wealthy see it as another opportunity to line their pockets at taxpayer expense. But at least this way our government is getting some of its overdue loan and tax payments back…