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Second stimulus

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Tuesday, Oct 21, 2008

Just in time for flagging consumers, Fed chairman Ben Bernanke came out in favor of another stimulus package, some of which would possibly take the form of the government sending us all some money (as opposed to dropping it from a helicopter, or burying it in holes for us to dig up, as Keynes once suggested).


This might help cushion the blow of recession, but it seems like another Band-Aid, temporarily forestalling the eventual reckoning that American consumers must inevitably face—that we can’t go on spending more than we save. (Of course, we could all use stimulus checks to pay our credit-card bills, but that would negate their intended purpose, which is to increase demand.) As Yves Smith notes, now might not be the ideal time for consumers to start saving, worsening the economic downturn, but it has to happen at some point. So it would be better to direct a fiscal package at infrastructure investments:


We have long warned that America’s debt-fueled consumption, at over 70% of GDP, was unsustainable and that bringing it down to a healthier level would lead to an economic contraction. Having consumers get the savings religion during a downturn will make the recession more severe.
While we think that the pain of increasing savings is salutary (akin to lancing and cleaning out a festering wound), the powers that be want to keep demand up via another stimulus package. I’d be much happier if measures like that went to well-targeted infrastructure programs and other investments in the future productivity of the economy, rather than trying to keep the consumer spending bubble aloft.


That’s a good way to think of what has happened in the past few decades: a consumer-spending bubble. But of course, it doesn’t feel that way to we who have enjoyed it. It just feels deserved. The same is true of the housing bubble to a degree; people don’t believe their houses are overvalued, regardless of how out of whack the ratio to rents or to median incomes have become. They just don’t believe it can go backward and that value can disappear into thin air once it has been created and made palpable to them. So it seems odd that the state would intervene to boost consumer-spending at the very moment that they begin to deal with the painful reality that their consumption level was something of an illusion and adopt a propensity to save and conserve. Instead, the government wants to continue the infamous Bush program of patriotic shopping: For the good of country, we must consume.

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