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Borrowing Analogy for the Economic Stimulus Package

February 8, 2009

I had the chance to watch a couple of the Sunday morning news programs and it was fascinating to listen to the various arguments and points between those for and those against the economic stimulus package presently before congress. In principle, I’m probably more against the plan. However, I am sympathetic to those who say doing nothing is not an answer.

 I understand that the government can acquire revenue four ways:

  • Levy taxes
  • Sell bonds
  • Print new money
  • Reduce current expenditures and use the cost savings elsewhere

Nowhere do I see any meaningful discussion for the government to eliminate any expenditure. There may be some tax increases for certain individuals but that’s a small percentage of the total cost of the stimulus package. There’s no talk of printing the money. Therefore, that only leaves the selling of treasury bonds (and similar things) by the government to generate the revenue for the stimulus package.

That said, a fundamental question for me is; does it make sense to borrow the money? A commenter on my Economic Stimulus Package Analogy post said, “If everybody in a country decides to cut down on spending, then we have a recession or a depression in our hands. This is called the Paradox of Thrift.” Perhaps so – but the larger question for me is can the United States continue to afford buying on credit? At some point, there has to be a decision that it is no longer economically viable to continue borrowing because of the interest on the debt.

For an analogy, let’s consider an independent roofing contractor:

  • Let’s say he charges $4,000 to replace a roof ($3,000 for materials and $1,000 for labor) and that it takes him five days to do the work. For simplicity, we’ll say he never takes a day off so over the course of a year, he’ll replace 73 roofs (365/5) and generate a total income of $73,000/yr.
  • He can’t change the cost of materials, but with new tools and a special truck with a lift, he can cut the labor time to 4 days/roof.
  • He buys the truck and tools at a cost of $54,000.
  • He now can replace 91 (365/4) roofs per year and generates an annual income of $91,000/yr.
  • The increased productivity generates $18,000 ($91,000-$73,000) more income per year. This allows the roofer to pay back the loan in three years ($54,000/$18,000).

Maybe this kind of borrowing makes sense. However, if the truck and tools wear out before they’re paid-off the roofer is back to the old income with increased debt. Not good! Will there be an increase in this country’s productivity from this stimulus package to pay off that debt? If not, then what is the point of having the stimulus package?

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11 Comments leave one →
  1. mattpritch permalink
    February 8, 2009 2:43 pm

    I totally agree. I know it is an incredibly simplistic statement, but “don’t give a man fish, instead teach him to fish.”

    We are in a place where we are dumping billions of dollars into companies that are not improving their practices. They need to refine (or just toss out completely) their business models. Cut spending.

    For the government to take a loan and not ensuring their ability to pay it back is a very risky thing. Hopefully there will be some policies put in place demanding more from the companies bailed out…

    Matt Pritchard
    Out of Debt Christian

  2. February 9, 2009 8:05 am

    I strongly suspect that neither side really knows what they’re doing. The problem is simply too large, complex, and interconnected with economies of other nations, over which the US has no control. To fix most things in the universe, you have to get it to sit still at least for a short period of time. This is a dynamic situation. If we as a society actually knew what worked, and could establish a cause and effect relationship with any certainty, we would have done it by now. Don’t you think?

  3. Anonymous permalink
    February 9, 2009 9:42 am

    A country’s economy, particularly when its interconnected with economies of other nations is a dynamic situation. I tend to think that in general people understand cause and effect relationships. It might be that one’s perspective alters what they see and how they see it. So, what’s the solution. I’m not sure. But I get concerned when the president (or anyone else) says that we have to do something BIG to fix this economy and that we have to do it NOW.

  4. Bob permalink
    February 9, 2009 9:50 am

    How then does one determine the best course of action for where this country’s economy is? Principles? But I’m guessing not all principles are created equal. So, how do we decide. Well, I guess this nation decided to some degree last November which set (or whose) principles will guide the stimulus package currently before congress.

  5. Todd permalink*
    February 9, 2009 7:43 pm

    Let me see if I get this. We still haven’t released $350B from the $700B but we have to spend over $800B more. The DOW Industrials seemed to have stabilize in the $8,000 to $9,000 range. Existing home sales were up last month – new home sales are still down.

    Maybe we should just wait a little while and see. Maybe the worst has come. Maybe the Government doesn’t know how to fix this but the market does.

  6. Bob permalink
    February 9, 2009 9:37 pm

    I recently heard the phrase that a recession is an economy out of balance such that there is insufficient demand for the oversupply of a segment of the economy. I tend to agree that housing seems to have bottomed out. The DOW is currently hovering around 8000, down from its high of 14000, and seems to have found its “bottom” – where people will start to invest again. I’m not convinced that the $800B stimulus will do what it’s supposed to do and therefore isn’t worth the risk.

  7. Todd permalink*
    February 9, 2009 11:03 pm

    Me too.

  8. March 25, 2009 8:56 am

    “Nowhere do I see any meaningful discussion for the government to eliminate any expenditure. ”

    What rubbish! Honestly… **shakes head in disappointment.**

    Last night, Obama made several mentions of the spending cuts he plans to bring about – not least of which is to stop churning billions into the Iraq war. That’d save us $600 billion over the course of his administration. Not exactly chum-change, sunshine.

    Let’s concentrate on fact and try not to rebleat conservative propaganda, pls.There’s plenty to be critical about with Obama’s plans, but critics still seem to spend more time making stuff up than addressing the REAL issues.

  9. Bob permalink
    March 25, 2009 1:37 pm

    Roland,

    I appreciate your input – but I think we can disagree without being disagreeable. My name is Bob, not sunshine.

    First of all, the war in Iraq is winding down just as President Obama is stepping up the war in Afganistan – he recently authorized sending 17,000 more troops there. So, It’s not clear that there’s going to be a savings of $600B over the next four years. Still, taking that number at face value: a $600B savings over four years equates to $150B/yr. I’ll agree, that’s not chump-change. But, as I said, it’s not clear that we’ll see that “savings”.

    As to other spending cuts Mr. Obama plans to bring about – I watched the presidential address last night – what did I miss? I heard no spending cuts. What I heard is his determination to increase spending now with the expectation that later spending will be brought under control particularly in the areas of health care and energy. But I think there’s honest debate as to the merits of Mr. Obama’s plans. To me, these are ‘real’ issues. I’d welcome your thoughts and opinions.

    President Obama has put forth a fiscal budget of $3.6T. Do you recall how much President Bush’s last fiscal budget was? Do you know what the annualized growth of government is (as measured by per capita spending) since 1960? Is our government planning to spend more or less now that we’re in a recession? Did President Obama increase government spending with his recent signing of the omnibus appropiations bill (which by the way included over 8000 “pork projects” – to which Mr. Obama had told us during the presidential campaign that he’d eliminate. I’ll tip my hand and state again, nowhere do I see any meaningful discussion for the government to eliminate any expenditure. Please feel free to identify where the government has reduced any expenditure.

    By the way, what conservative propoganda have I bleated out? This post came about because I was trying to understand the pros & cons of deficit spending. The best way for me to understand this issue was to equate deficit spending to buying something on credit. I came to the conclusion that sometimes deficit spending might indeed make sense. Does deficit spending make sense now? I honestly don’t know. Let’s talk about it.

  10. March 27, 2009 3:36 pm

    Ah, Bob, you’ll always be a ray of sunshine to me!

    Comparing Bush’s spending to Obama’s is comparing apples to oranges. Bush was elected on his promise to reduce the government. He inherited a significant surplus. In eight years, he led us into an enormous hole. After 9/11, I can understand spending more on national security and action in Afghanistan… but Iraq? The only thing worse than blowing 600 billion there was getting 4,000 brave American troops killed.

    Obama inherited billions in deficit AND the worst economic crisis of our lifetime. He either spends his way out of it, or we leave it to ‘fix itself’ and go back to Hoovervilles and soup kitchens across the nation.

    I’m not entirely convinced about Obama’s strategy (http://rolandhulme.blogspot.com/2009/03/toxic-assets-giving-worth-to-worthless.html)

    But I am convinced that it’ll be hard for it to be worse than what went before!

  11. Bob permalink
    March 27, 2009 7:13 pm

    Roland . . . Roland . . . Roland,

    I’m delighted to be a ray of sunshine to you. Perhaps I can disinfect some aspects of your thinking. 😉

    Mr. Obama inherited ~$480B in deficits. Agreed. However, I’m not entirely in agreement that Mr. Obama inherited the worst economic crisis of our lifetime. I’ve read and seen various reports identifying the recessions of 1973, 1980 and 1987 as being worse (at least for right now) in terms of aggregate loss of capital and unemployment. I’ll dig up the actual numbers if you say “pretty please”. Nevertheless, I’m old enough to remember home interest rates of ~16% and inflation rates of ~15% in 1980 as well as “Black Monday” in 1987 where the DOW dropped ~40% of its value (in one day!).

    Thanks for linking your post about President Obama’s strategy. I hope readers of this blog will visit your site – and especially read the comments I put there!

    I’d rather not debate the merits of the US going into Iraq within this post. Perhaps we could bash that back and forth on another post. Still, you have to be concerned that Mr. Obama’s first year deficits are three times greater than the $600B that has been spent in Iraq. Moreover, these projected deficits, in addition to those deficits forecast through 2012 don’t (in my opinion) realistically take into account Mr. Obama’s intention to reform social security, health care, energy and education. And just today I heard a news report that Mr. Obama is ordering 4000 more troops to Afghanistan and putting a policy into place to root Al Qaeda out of Pakistan.

    So, is the proper course to spend our way out of these difficult times? I don’t think so. I’m not sure this example is a good correlation – but it seems to me that President Obama’s plan to spend our way to a more prosperous future is similar to a family using credit cards to make up lost income when one member loses a job. Yes, there’s “purchasing power” and no immediate loss to one’s lifestyle. But there’s a cost. And just as an individual can spend their way into bankruptcy, so too a nation can spend its way into bankruptcy – which would certainly bring about Hoovervilles and soup kitchens across the nation.

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