Money WhizDom: Is this stimulus package for real?

Adhvith Dhuddu, CT regular columnist

Wednesday, February 20; 12:00 AM

We all know that chugging a Red Bull to stay awake on exam night only works temporarily to make us more sluggish later on; this is exactly what the stimulus package will do to the economy. Exactly a week ago, President Bush signed into law a $170 billion "stimulus" package in an effort to avert an economic downturn.

Packed with housing subsidies to boost the ailing housing sector (which many say triggered this slump) and tax rebates checks to fuel consumer spending, the administration is hoping its delayed action will prevent a recession in the second half of the year.

Our economy experienced monumental expansion in the 1990s, and its primary drivers were low to minimum inflationary fears, moderate interest rates, extremely high productivity levels, an across-the-board explosion in investment activity, high levels of consumer spending and strong local currency. The environment was so conducive to growth it led to "irrational exuberance" and an eventual bust in late 2000.

This was exactly when a similar "stimulus" package was announced, and history tells us this did little to prevent a recession. Although it did stimulate the economy temporarily, we experienced a recession for a brief period.

It is unfortunate that the same administration is adopting a failed strategy again and is not focusing on long-term economic stability. A good economic stimulus package should help develop long-term stability and create an environment like that of the 1990s. This package fails to achieve that.

Inflation is already at scary levels, and with more than $150 billion entering the economic system, we can expect higher inflation very soon as more money will chase the same goods and services. The low interest rates (which will continue to decline) are only adding fuel to fire (more borrowing, more spending, more inflation). Investment is slowing down drastically, with more money finding its way to developing nations and BRIC countries. This in turn is hurting productivity levels, which are either remaining constant or inching up at a snail's pace. The only good one can see is a boost in consumer spending, which is temporary.

One thing is for sure: This stimulus package will without doubt stimulate the Chinese economy. Close to 60 percent of the $150 billion of tax rebate money in the consumer's hand will be used to purchase goods manufactured in China (electronics, clothes, toys, etc.). That's appalling considering our huge debt to China and the proposed $3 trillion budget for the coming year. This stimulus package is sure to strain us financially, but I assume there is no need to worry because we can continue to borrow — from China.

The topic of the weak dollar has been beaten to death, and in no way is the stimulus package helping the dollar's perilous path. Though it has received some praise, seasoned economists and forecasters don't see how this stimulus package can prevent a recession or assist long-term growth.

Removing your clothes from the washing machine in the middle of a cycle will only get you wet, soapy and messy clothes; this is exactly what happens when one tries to manipulate and maneuver a business cycle when it enters a healthy temporary downturn. The result will be a bigger mess that needs to be cleaned up later. In every crisis lies an opportunity, and in this case the administration should have put forward a more comprehensive plan to support the economy and facilitate long-term growth.

Unfortunately, none of the presidential candidates are proposing an economic plan that touts long-term stability. The presidential candidates should outline economic plans that stimulate and increase investment, decrease inflation, increase productivity, increase savings, strengthen the dollar and should in no way be a growth deterrent.

Not so long ago, an economy on the other side of the planet experienced something similar. Drawing these scary parallels might be pushing the argument too far, but the similarities are so vivid that the U.S. should learn from its mistakes. I am of course talking about the Japanese economy from the 1980s and 1990s.

They experienced a stock market boom, a real estate boom, a credit crisis, a cleanup of the banking sector, regular stimulus packages and extremely low interest rates for years to try to stimulate the economy, and only now, 15 years later, is the economy getting back on its feet.

Online link to this article:

http://www.collegiatetimes.com/stories/2008/02/20/is_this_stimulus_package_for_real_