The Economic Stimulus Plan: My attempt at deciphering the why and the what (Part 1 of 2)

WEST COVINA, California – As I write this, the Bureau of Economic Accounts has just released its fourth quarter Gross Domestic Product (GDP) report showing that the US economy contracted by 3.8% over that period. Now that I’ve gotten that sentence out of the way, let me assure you that I try to keep my notes as “user-friendly” as possible so some people actually keep on reading.

The focus on this note is to try to provide a simple (hopefully not simplistic) guide to relate what’s going on in our economy and what the current economic stimulus plan aims to do to address this slumping economy. This stimulus plan has just been passed by the House of Representatives and will be taken up by the Senate next week.

To those of us who have taken Economics 101, the next few paragraphs will be basic. To those who haven’t please bear with me as I try to provide some simple explanations.

GDP is the over-all measure of what was produced by a country’s economy over a specific period of time. The GDP is arrived at by the total of Consumer Spending (C), Business Investment (I), Government Expenditures (G) and Net Exports (Exports (X) less Imports (M)).

Consumer spending has generally accounted for 2/3 of the US economy. This fell 3.5% in the 4th quarter of last year. Business investments fell by 12.3%. Government expenditures rose 1.9%. Exports were down 19.7% while imports were down 15.7% with the over-all effect being that the US made slightly more money from exporting goods and services than what it made from importing goods and services.

I hope I haven’t lost you so far (or maybe I have but hey it’s a tough subject – economics).

The bottom line is that consumers are not spending as much money because they don’t have it (or if they do, they’re stashing it under the mattress), businesses are cutting costs like crazy and the government is trying it’s best to keep the economy afloat (by design or accident – I leave that for you to decipher).

Okay, now that we know that the numbers have confirmed what we already know, let us go back to the stimulus bill.

Essentially, what the stimulus bill is meant to do is to try to dump a boatload of dollars into the economy in a bid to re-inflate it. There are many ways by which they are trying to do this and I won’t bore you by trying to go into too much detail.

In general, there are 2 ways. The first is by directly spending the money, an example of which would be infrastructure investment in building roads, bridges, and schools – that kind of thing. The second method is by reducing taxes on both individuals and businesses with the hope that individuals and businesses would then have more money to spend.

Now, let’s have some perspective here. The size of the US economy is $14.26 trillion. If that figure represents a drop of 3.5%, then the value that has been lost by this economy would be a little over $500 billion. The economic stimulus bill in its current form calls for $819 billion in new spending and tax cuts. It would seem that the math says we are going to fix this in no time. Unfortunately, the real world is the real world.

First, the economy continues to slide with a slew of new lay-offs, a continued tightness in lending and just an over-all decline in production. As such, the value lost in the economy will continue to grow at least until the third quarter of this year (my guesstimate, don’t hold your breath). Second, assuming the Senate passes the bill next week and President Obama signs it into law, the bulk of the spending anticipated by this stimulus package will not happen overnight. Finally, no one can say with any degree of certainty what the over-all impact of this stimulus package will be as to its effectiveness and as to a time frame for when it actually makes a difference.

Economics is an inexact science (to say the least). Arguments, one way or another, for and against this stimulus package is underpinned by this lack of clarity. By the time, all of this is said and done and President Obama finally signs some stimulus package into law, all of us amateurs who deign to pay too much attention will end up being dazed and confused (whaaaaat?).

(To be continued – Part 2: The Economic Stimulus Plan: What I really think)

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