The Economic Stimulus Plan: What I really think (Part 2 of 2)

CHINO HILLS, California – In addressing the current economic malaise that we find ourselves in, people focus a lot of attention on the expected tangible effect of the economic stimulus plan on the economy. Less, if any, attention is given to the psychological impact of having a plan in place.

Let me comment on the tangible effects first. The passage of the stimulus bill in the House of Representatives was notable for the absence of even one Republican vote. This reflects the philosophical and ideological differences that divide the left and the right. Both sides of the aisle agree that something needs to be done. The manner and priorities within the stimulus package is where the differences lie.

These differences are rooted in the continued debate over the level of involvement of government in the day to day lives of its citizens. Republicans, in general, cling to the mantra that less is better.

It is probably fair to say that both Republicans and Democrats agree that a combination of both direct spending by government and tax cuts is necessary within the stimulus bill. The proportion by which the pie is divided between these two is where the bickering starts.

Putting money in people’s pockets via tax cuts is the Republican way of conforming to the less government is better mantra. Direct spending via the likes of infrastructure investment and social/entitlement programs is what Democrats have focused on.

Each approach will have their stimulative effects. It is the effectiveness of these effects that are the bone of contention. In a sense, each involves a certain leap of faith given the severity of the current crisis as well as the size of the proposed stimulus package. In Part 1 of this missive, I had mentioned the inexact nature of economics. This reality lends itself to all the manner of seemingly reasonable justifications for the various approaches to attacking the crisis. Another reality is that even economists agree that no one really knows the final outcome coming out of this stimulus package.

So, in spite of all the noise we hear, no one can persuasively argue that there is the one perfect solution to resolving this crisis because no one really knows what it is or even if there is one. This takes us back to square one where everyone knows that something needs to be done and we can’t agree on how to go about doing it.

This brings me to the area that has not been the focus of much discussion – the psychological impact of having an economic stimulus plan.

To those of you who have followed my notes, I have always contended that uncertainty is Kryptonite to the markets. Uncertainty does not allow the formation of reasonable expectations upon which we can base some future action. This leaves us stuck in place going nowhere fast.

At the end of the day, it is the psychology of confidence (or the lack thereof) that will determine how fast we can get out of this rut. For decision makers (yes – that includes you, the individual consumer) to finally make decisions which will have the effect of driving the economy forward, they need to have some level of confidence that their decisions now will not negatively impact their financial well-being in the future. A prerequisite (conscious or unconscious) for making these decisions is an underlying confidence that things are being done to address the current problems and move us all forward.

That things are being done…

We will never end up with the perfect solution even if we are to divine that there is one. Thus, I sincerely believe that any stimulus plan (in whatever form we finally end up with) is better than not having one. The naysayers will probably come up with something along the lines of – “what if this is all totally wrong and even after all this spending we come back to where we are right now?” I would say that – well, how would we ever find out if this was the wrong (or the right, for that matter) approach if we didn’t try it.

In all likelihood, the implementation of a stimulus package of this size will involve a lot of trial and error on the part of those mandated to carry out this task. There will be a lot of mistakes that will be made along the way. There will also be a lot of things that will be done just right. I believe that we will get more things right, learn from the mistakes and get them right.

Let me end by saying this – something needs to be done and done quickly. When the final accounting is done, we will look back and see that getting things moving at this time was the right decision after all.

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