Borrowing Analogy for the Economic Stimulus Package
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?