Grading the Stimulus Plan (Morningstar)

Christine Benz: Hi I’m Christine Benz from Morningstar. With Conquerers considering a $825 billion stimulus package we thought that it would make sense to try to put this numbers into context. Here today with me is Bob Johnson. Bob is Morningstar’s Associate Director of Economic Analysis. And Bob I assumed you’ve been studying the stimulus package and thinking about what it means for investors an consumers. First of all what’s in the package currently? Bob Johnson: Sure, the package proposed today as you mentioned $125 billion package. About the bulk of it 365 billion that is for breaking more of the projects, things like new load. So the things like infrastructure all those type of things. A $185 billion is additional spending by Congress, $275 billion is some type of tax for and individual for corporations, and that’s how it breaks down. Christine Benz: So $825 billion is obviously a huge number can you help put that in context reviewer what does it mean along the side. Other spending that perhaps has been done in the past. Bob Johnson: Sure to give you some idea our whole economy for example is about $14 trillion so this stimulus package represents about 6% of our GEP so a very significant in number and now on itself. Last year when we had those tax rebate cheques and with that prospective is about $168 billion so this plan is clearly far bigger than that. Christine Benz: So the key question is the stimulus package is at currently stands what are your thoughts on how likely it is to cure what’s ailing the economy currently. Bob Johnson: Well I think it’s a very good plan then it gets a lot of things moving again. I think the key is to get consumer confidence in the right direction again and then get the consumer spending. Because the consumer leads all other spending in our opinion and so this bill attempts to get to the heart of that. Christine Benz: So what aspects of it unparticular do you think are the most likely to get consumer spending going again. Bob Johnson: Sure well the most effective part will the attack to it because that’s something can come very quickly. You can send that rebate cheque to get people a holiday on their tax payments immediately. And then people tend to spend those relatively quickly and so that’s a direct impact. On the other hand the infrastructure projects, you need to put out a bid, you need to take your time, you need to identify the projects. So very, very little of that money is going to be spent this year. So that’s not going to be terribly effective this year but the tax cuts will be extremely effective. Christine Benz: Now there has been some question or I’ve read something about whether previous tax cuts have achieved their desired effect or whether consumers have simply pocketed any tax rebates. What the history of stimulus as it effects consumer spending versus saving? Bob Johnson: Sure, it has been extremely effective and that the very interesting thing is they ask consumers up front what are you going to do with the cheques and most all of them will tell you they’re going to save them. But when you actually go back to the national income account numbers probably 60 to 80% of that money eventually get spend maybe 25 to 30% of it within the first three months and maybe another third of it the following three months and the balance over the rest of the year. So on the reality do and with that spending the money despite kind of what they, say and especially on the lower income brackets this people are just prone to spend what they get. And it’s just extremely effected you at the back of the tax with Kennedy in the 60’s, the Reagan cuts in 80’s and the two Bush rebates and tax cuts of ’01 and ’03 all directly effect you can immediately see it in the numbers. So just the good news that this works, the bad news is that’s it’s meant to kind of prime everything to get better over time. And last years tax rebate remember the money you got back last year. That money was spent, consumer spending went up but we didn’t fix the banking problem. So now were back in the soup again because the money did immediately stimulates spending but the problems on the financial side of the house continue. Christine Benz: Thanks Bob, that is useful context it will be interesting to see how things unfold. Thanks for joining us I’m Christine Benz from Morningstar.