Tag Archive: stimulus package

When the government spends $700 billion, you’ve just increased demand by $700 billion

The other day, my macro-economics professor stated something similar to the title of this post in class. While government spending and demand creation is not directly linear, an interesting point is made.

When the government actually spends, say, $700 billion on roads, bridges, green energy, etc, it injects that money directly into the actual economy. Construction crews, engineers, architects, etc all get hired back on to build things, researchers are brought back into the fold to work on new energy efficient materials and processing methods, etc. Those people now have salaries and will spend at least some of it on “stuff” which will help create jobs at the companies that make “stuff” and so on and so on. Yes, many of these people with new jobs will also save a lot rather than spend but overall you will get new jobs plus more spending which leads to even more jobs.

However, when you give tax cuts, there doesn’t have nearly the demand-creation yield rate (a term I just coined…) as direct injection of money. This is because if, say, 50% of people in this current economic environment will save rather than spend, and 40% of a $700 billion stimulus plan is actually in the form of tax cuts, then we get:

$420 billion directly injected
$140 billion spent from tax cuts

And while $560 billion is a lot of money, the other $140 billion is, too.

Obama on long-term economic plans

Stimulus must build stronger nation, Obama says – MarketWatch

“I have confidence that not only are we going to be able to create jobs, but we’re also going to be making a down payment on some critical areas that, as the economy recovers and the private sector starts investing again, we’re going to see some long-term benefits and long- term savings,” Obama said at a press conference in Washington.

Obviously I don’t have the full text of the speech, and I am acknowledging that any news source is just one source, written a specific way.  But…on the one hand, I’m really glad to see intelligent, long-term thinking applied to this topic.  We must plan ahead.  We must lay down the groundwork for the future so that we will avoid this.  We must rethink what we are doing now.  Yes, we need to think this way.  I completely agree.

On the other, it’s kind of sad that a speech has to be made saying that a $775 billion plan needs to be more than a quick fix.  I know this is a big problem and any dollar amount should be more than a quick fix.  But as was mentioned in both my marketing and econ classes last night, a big part of stimulus is getting cash in the hands of people.  Cash in the hand is easy to understand.  Cutting interest rates as a way of reducing the cost of capital and therefore improving the liquidity status (essentially) or ability of individuals is a bit harder to understand…which means that talk about long-term needs to be done very delicately.  So far, the quoted items make it sound like Obama did a good job.

Anyway.  Random thought.