Many are concerned about growing signs of a recession. The same administration that went on for years on a tax cutting and spending binge is now working with Congress to do a cash giveaway to get people to spend more money. Fuel prices are up. Biofuel demand is pushing up fuel prices up. The savings rate is negative. Inflation and unemployment are up. Would giving people a relatively small slug of cash spare us a recession? Does this make sense?
The real answer is no. $150 billion is small change in a $10 trillion economy. It is unlikely to move much of anything. People will buy some things and maybe that will help some folks, but it is not a consistent behavior over time. Consistently more money in people's pockets will lead to more spending, however is this the behavior we want? We've actually had a stimulus for some time. It the Iraq and Afghan war - to the tune of $1 trillion since 9/11. This money has flowed largely into the US economy to pay for military equipment and personnel.
What we are really doing is adding more debt to the economy. This spend-heavy generation has burdened our children to the tune of $29,000 of debt for every man, woman and child. We can't really just grow our way through it as the US is a mature economy with a long term growth rate of about 3%. We have underfunded Medicare and Social Security to such an extent that the real deficit is even greater if we used corporate accounting.
How did it happen?
Interest rates held down too low for too long + subprime fueled easy money and massive spending. People levered up on debt to go on a spending spree. They didn't read the fine print on their adjustable rate offers. This was exacerbated by tax cuts. They kept buying more expensive homes, some got into McMansions. Oil prices are 5x higher than just 3 years ago. To reduce oil consumption, the US is pushing ethanol, so that is impacting food prices. US spending on imports have led to massive growth in China, and to a lesser extent, in India. Salaries are rising. As Greenspan says, the price depressing weight of globalization is diminishing as overheated demand in fast growing developing economies raise import prices.
Now the bubble has popped. Homebuilding is way down with a massive amount of unsold inventory. Foreclosures are way way up. Inflation is finally recognized as rising in official reports. Worse, the subprime crisis has dramatically tightened lending. If this continue, people will not be able to refinance to lower rates. If the value of your house is down, no bank will lend you money even if you are carrying the load at a higher rate.
The US needs to move away from debt. We need to realize that we are a fully developed economy. Trying to grow out of debt just loads up obligations on future generations. The growth is just not fast enough to make sense. The US needs to be strong. Capital should not be used to prop up the US government, rather it should flow to private sources, lowering the cost of capital for all.
Moreover, savings should be encouraged, not spending. People who save can take risks, can start their own business or deal with an emergency without going to the government for a bailout.
So it's one thing if the Fed drops interest rates to spur growth. That's a significant macro effort as it impact everything from mortgage interest rate to corporate borrowing rates. A $150 billion giveaway leading to a slug of one time debt is not the answer.
It's time to get our house under control.