What's Wrong with the Populist Stimulus PlanGreg T. Spielberg
The past six months have offered lively debate over various plans to stimulate the U.S. economy. One of the more intriguing, if far-fetched, ideas that has been raised, including on BusinessWeek.com, is a populist stimulus scheme in which the federal government would move from the $300 and $600 rebate checks of recent years to serious money: $1 million for each of us.
In September, actor Russell Crowe got into the act, proposing to Jay Leno on The Tonight Show a plan that would toss $1 million to all 300 million Americans. The math for such a scheme is faulty—that plan would cost $300 trillion, not the $300 million Crowe envisioned—a sum far beyond the ability of even the most spendthrifty politicians. Such a large personal stimulus check from Washington has zero grounding in reality.
But what if the government decided on a still sizable personal stimulus injection? In order to keep the figure somewhat terrestrial, say we cut the imaginary tab to $2.25 trillion, or $10,000 for each of the roughly 225 million Americans old enough to vote. If Herbert Hoover could promise voters a "chicken in every pot and a car in every garage," why not set the economic bar a bit higher eight decades later?
On its face, such a populist stimulus plan has lots to like: Cut everyone a fat check and they'll pump the cash right back into making mortgage payments, starting new businesses, paying off credit-card debt, indulging on new flat-panel TVs—maybe even newspaper subscriptions would surge. And since demand in the global economy doesn't even approach current production capacity, inflation is hardly a worry. In fact, many respected economists think Washington needs to devise a way to stoke inflation in a controllable way.
However, as simple and attractive as it may sound to send the citizenry money, the idea has garnered almost zero support from most economic experts. "Increasing consumption willy-nilly is not a good public policy goal," says Smita Brunnermeier, a lecturer in economics and public affairs at Princeton University. "I don't really think that's the way to go," says Don Waldman, an economics professor at Colgate University in Hamilton, N.Y. "That sounds wild," adds his colleague in the department, Thomas Michl.
Beyond the multitrillion-dollar debt such a scheme would bequeath to future generations, a prime hang-up for economists is the fact that many Americans just wouldn't spend. Joyful recipients are more likely to splurge at first and then stash the rest for a rainy (or rainier) day. And if you're wealthy, $10,000 would hardly make a ripple in your bank account. "If you assume that rich people get it, it's a drop in the bucket," says Sebastien Gay, a University of Chicago economics lecturer and private consultant. "It'd go straight to their savings account."
Savers vs. Spenders
While saving money is typically a sound practice, it would deaden the populist stimulus plan's momentum by reducing its multiplier effect. In true trickle-down economics, the $10 one spends at a local barbecue restaurant provides employees with $3 and the owner $7 for the business. The owner passes the $7 along to the company's suppliers, where it is multiplied again as it pays the costs of running their businesses. Without the initial push, revenue streams run dry. (An influx of money could also stimulate crime: Robbery and other forms of theft might well increase if everyone suddenly got a large check.)
Excessive saving, which was part of Japan's difficulty during its "lost decade" of stagnation in the 1990s, is often an attribute of a public wary of the future, says Markus Brunnermeier, an economics professor at Princeton. (He is Smita Brunnermeier's husband.) When we're wary of the future and receive a gift of a large bundle of money, we're likely to think of going straight to the bank. Gay, who focuses in part on behavioral economics, says many of us would immediately recognize the interest-yielding potential of a lump sum. Thus there would be no multiplier effect, no re-injection of the cash into the economy on a large scale. "That is quite a huge amount of money, right?" asks Gay, hypothetically. "The way that [people] would treat it is that they would think about it as a straight increase in their wealth."
"There's only one thing money won't buy, and that is poverty," comedian Joe Lewis once said. But the poor, in the case of the populist stimulus plan, would actually provide the best chance for kick-starting the economy. Gay and Michl agree that the poor are more likely to spend quickly and with vigor. Many poor Americans also don't have a checking account; with no place to put a stimulus check, the money could actually stimulate. According to a 2008 policy paper by the Brookings Institution, 12 million households do not have checking accounts. That fact alone could mean a direct $120 billion injection into the economy, not counting multiplier effects.
Another problem? A pure-populist stimulus wouldn't address the deep structural weaknesses in the U.S. economy, such as heavy consumer debt loads, empty and foreclosed houses, rising unemployment, and icy credit markets. "These are serious, serious, interconnected problems," Waldman says. "Ten thousand dollars isn't buying anyone a house. It's a total, complete mess." Twice during President George W. Bush's term, Congress authorized checks. In 2001, the checks ranged from $300 to $600, and in 2008, most people received between $300 and $1,200. In both cases, the stimulus effect was quick but short-lived.
In addition to the weak multiplier of the populist stimulus plan, any huge sum transferred from Washington to the public would come with an even larger opportunity cost as other forms of stimuli were bypassed. President Obama's stimulus plan, which currently is expected to be around $825 billion, looks to be a more diversified approach, dividing relief between businesses and citizens.
Although many people will likely see a tax break from the stimulus legislation, don't expect any $10,000 checks from Uncle Sam.