Will a Stimulus Fix Our Problems?

BY busadmin  February 4, 2009 at 10:49 AM EST

Republican senators discuss the stimulus; AP photo

A question from various sources: “Will a stimulus fix our problems?”

Paul Solman: Let’s begin with a prior question: What’s the economic justification for a stimulus? The answer is that an economy’s annual output — its Gross Domestic Product (GDP) — is made up of four basic factors, as I’ve written here before: Consumption or “C”, Investment (I), Government (G) and Net Exports (NX).

What we need right now, in order to put idle resources (mainly people) back to work is immediate spending. “C” isn’t going to do it, which is where this all started. Just read the anecdata in answers to the survey we ran here recently.

Or consider the Monday, Feb. 2, announcement that consumer spending dropped one percent in the month of December, after a nearly one percent drop in November. That’s an annual decline of 10 percent or more. Since some 70 percent of our $14 trillion economy is consumer spending, that’s $10 trillion a year worth of “C.”

Ten percent of that is a one trillion gap right there, a gap for a government “stimulus” to just to keep us even. And that’s not counting “I” — business investment — which is also dropping since businesses are scared to death, and not exactly in “investment” mode, or “NX”, since foreigners aren’t exactly gobbling up American goods and services at the moment.

All that’s left, then, is “G”: government. Hence the stimulus, an effort to make up for the lack of “C” and “I” and “NX” spending so the economy won’t shrink too drastically. The idea is to soften the blow of the crisis. The “old” economy was based on consumerism, fueled by debt. If we change overnight, too many jobs will vanish without any new jobs to replace them. As a result, we’ll spiral down and down, laid-off workers further curtailing THEIR spending, leading to further lay-offs, etc. This is a spiral that would be self-reinforcing, painful and dangerous. Thus the imperative, reiterated by Alan Blinder in the Feb. 4, Wall Street Journal that the government spending be done RIGHT AWAY so it can slow the spiral NOW.

Will the stimulus fix our problems? Here’s an unsatisfying but true answer: We’ll never know. Until we gain access to parallel universes, should they happen to exist, we only get to run each policy experiment once. We cannot know what WOULD HAVE happened had we done something different. But the risk of doing NOTHING to revive the economy — and restore confidence — seems unacceptably high at the moment.

And remember the premise to which the Business Desk has pledged allegiance: It is confidence that drives an economy; “credit” comes from the Latin “credere”: to believe. Call it our credo.