Thursday, January 17, 2008

Stimulus Package

The idea of stimulus in recessionary times inevitably ties into the popular manta of the consumer found in popular economic reporting (and in fact used by successful investing and asset management firms). Usually it goes something like this “Will the US consumer ever stop?” or “US consumers are 2/3 of the economy” or “We will whether the storm because of the resilient US consumer” or “Economic predictions are subject to variability due to the possibility consumers will significantly change their spending habits.” We have all heard it, but what really annoys me is the assumption that consumers spend exogenously (in a vacuum) or that if consumers decided to spend less this would be irrational.

What follows from this belief is policy makers decide that since these consumers are so irrational about their spending preferences let’s take away some of their income through increased taxation and spend it for them on areas throughout the economy. These areas are in my view random but “experts” have determined them to be areas of optimal growth for the economy as a whole. Sweeping assumptions like this have many weak points but I will elaborate on one. Economic phenomena like efficiency, innovation, low prices, and increased standard of living are all attributable not to experts with a top down view over the economy, but to individuals making self-interested decision about their everyday lives. It is truly nobler economic work displayed by the poor single mother of two than the government bureaucrat invoking massive governmental funds to employ stimulus to the most relevant sectors based on the latest research.

But back to the consumer. There is no reason to think that consumers’ preferences in the broad economy have recently gone from rational to irrational due to expectations of recessionary times. Certainly consumers can display irrational behaviors and crowd mentalities, which may account for natural business cycles. It seems the only cure for such irrational exuberance or gloom is to let these irrationalities bear their consequences, which all irrationalities will, given time. But the greater point here is who knows if consumers are being irrational? Maybe circumstances in their daily lives are signaling to them that a change of behavior is in order for which only their avoidance would be irrational. Taking this prospective a stimulus package of spending declares “the consumers must be irrational,” therefore, let’s correct them. When in actuality the government has then forced an irrational policy that will certainly have equal, and more likely, greater negative effects then the reduced spending would have in the first place. For where daily livelihood is concerned, especially among the poor, people can be expected to behave much more rationally than say the investing community. Why? You might ask. For “the investing community if filled with some of the best and brightest with outstanding educations.” Yes, indeed but they have a greater leeway to be wrong. They can shoot for risky actions that may turn out to be irrational in hindsight and still have an insurance policy to fall back on (their education for one, ever if they are reaped of their money). However, the poor person is forced to become rational and less risky. The poor and middle class have real decisions to make. The poor quite frankly might not be around if they display repeated actions of irrationality. Their likely destination will be jail, death, or homelessness. The middle class have important consequences too all though maybe not so grave, “Will I be able to send my kids to college?”, “Will I have money for retirement?”, and many other issues that may lead the consumer to say: “maybe I will need to save now in order to be able to ensure goals in the future.” In conclusion, I find it hard to believe that there is great evidence to suppose that consumers are heavily irrational in times of recession. Why take money from the ground level where consequences are concrete and measureable in order to reallocate it into the sky where it will drop down to more specific beneficiaries with consequences vague enough to establish an industry of academics trying to discern the benefits. Aren’t concrete and measureable consumer choices the key to our efficiency, flexibility, innovation, and wealth creation?

Granted this is one kind of fiscal stimulus option—the other being cutting taxes. Cutting taxes would have a rather opposite allocative effect. More consumer choice with concrete and measurable consequences would ensue. However, in the interim this is a fool’s goal since this effect will only produce this result with an equal CUT in spending—which seems increasingly difficult for our federal government to accomplish in general not to mention in a short enough time period to ease a recession. But who says this would ease the recession anyways? If given more of their own money the consumers may choose to save it all. Unlikely, but possible if imminent recessionary times are forecasted. Even if this measure didn’t ease the recession it would in fact be a more appropriate response since individuals would make a more accurate allocation of their income based on their subjective expectations of future economic prospects.

No comments: