Stimulus Myths Dispelled (Morningstar)

Pat: Hi, I'm Pat Dorsey director of Acuity Research at Morning Star. With the dry end stimulus package lending its way through congress right now, I thought that it would be worth taking the opportunity to talk about of the myths surrounding the stimulus package. With might work or wont work and just what is contained in these two giant $800 billion bill. I lucky to have with me, associate director for economic analysis Bob Johnson to help me out poke through some of these naughty 890 page long issues, if that’s what the current count is. And then just to get a kind of a status report of where we are at the moment, you know, the house version is passed, the senate version is likely to be voted on Monday or Tuesday but then, it goes into conference and they got to kind of work out the differences, right? Bob: Absolutely, they each have a bill and they’re each quite different. Pat: And so, let’s talk about some myths around the stimulus package right now because everyone who’s been talking about this on the Tube and I the newspapers seems to think they know exactly what this economy needs and what you need to fix a massive financial crisis. Perhaps that’s a little bit of self confidence? Bob: Aye, absolutely Pat because we don’t have that many examples to look back on in history and even those have different circumstances on them. Right now, the too pervious people are liking to look at is, the great depression and the Japanese’ situation. And of course those were both very different. Pat: And so with silver drawing conclusions about spending a $100 billion, we were very confident about what will work and what wont based on a data set that is consistent to examples over 80 years. That makes a lot of sense, doesn’t it? Bob: That’s why kit gets tough to really figure out exactly what’s going to happen here. Pat; exactly, so it’s worth sort of putting a little bit of grain of salt into all those prognostications that one hears. Bob: Exactly. Pat: And the second myth, it seems to be kind of coming out in the media right now is that you got $800-900 billion bill whatever what that is being, that’s going to hit the economy like a sledge hammer next month, that’s not right is it? Bob: That’s exactly right Pat. It is spread out over time, there’s about a half of it that deals with tax cuts and benefit programs that will come over the next 2 or 3 years and then some of the infrastructures spending that’s built into the bill actually happens over the next 10 years. So, really, if you added it all up, about half of it gets spent in the next 2 or 3 years and the other half gets spent out over the next 10 years, so. Pat: And that’s an important thing to do which is just sort of break what’s been tainted in these two bills into 3 bare, big categories because there are tax cuts or tax changes or tax relief, however you want to put it. There are changes to government benefits and then there’s finally this infrastructure package that seems to absorb most of the headlines. Take us through each of those. Bob: Yes, absolutely. First of all ion the tax side, the biggest thing is, a $500 per person tax credits and that money comes this year and then again ext year for each person and that’s about 50 billion in the package and then there’s various corporate tax programs that are in there that might mount to another $100 billion or so, so that’s a huge chink, its just tax. Pat: And concerning that tax break, you know, so this here is a $500 per person over a couple of years and obviously that sounds good because it gets in the economy pretty soon but of course everything’s got a possible bad side. People prefer what you say, if its kind of going up as this crisis is getting deep so, we don’t really know how much of that would get spent versus saved. Bob: That’s right, that’s always the big question and it’s fascinating because people will always, if you ask them, they are going to save every penny of it. It was all of last spring’s rebate that people said they are going to save every penny of it and actually almost all of it got spent. So, it depends on again as you say it, they are such as limited samples to make a firm conclusion. Pat: I got you, and then the second category is that, is that its not a really stimulus, its really not building bridges to nowhere, its changes in governmental benefits. Bob: Yes and a lot of them are really meant to help people that are in some dire straits, I think it’s a pretty good idea to do some of these. They are extending some of them— Pat: When I think of them as lifelines, of a sort. Bob: Yes, I mean when somebody of them gets laid off, the biggest worry is health care. And right now they’re going to fund that in such a way that people have a chance to extend their benefits even if they don’t have a job for their health care. It’ll kick some money in the Medicare and Medicare programs so that those in this time of physical difficulty are able to pay out all of their bills. Pat: And so that’s the stimulus then more sort of a shoring up of this social safety net. Bob: Right, I mean that’s not small box I that program either, its a $100-200 billion of the program is in that type. Pat: Oh, exactly, its certainly maybe very well worth doing but its kind of hard to categorize it as stimulus per se. and then moving on to the part that of course people always do categorize as a stimulus which is the infrastructure portion, that has a longly time to it, does it? Bob: Absolutely, it takes time to spend that money and there are things like buying real cars and building highways, well by at time you do the design and do the competitive bidding and whatever, you maybe 3-4 years out of this program before that money actually get spent. So, they maybe in and out of themselves worthwhile projects but you probably should’ve separate them from the stimulus because they are so far separated. Pat: And I think the important thing to take away from all of these is, we’ve got different types of spending, are they going to have different effects over different time periods and as you’ve pointed it out where there is limited datum that we’re not quite sure how its going to work. So, you know, it’s pretty easy to sort of throw it in and say why bother? But you brought up an important point to me why this is worth doing from a psychological standpoint. Bob: Absolutely, again I'm not of a big believer in government spending but I think that right now we got a soft spot in the economy. People are afraid to spend by seeing that the government’s got a plan in mind that they got a back stop for us here. They’re actually going to spend a little money and hope that other people spend their money that it’s an important effort to keep going and get going now. Pat: Yes, it’s an important thing to remember that the economy is not run by robots. It is not run by mechanical people looking at balance sheets and line that as making rational decision, it’s real people with real emotions making real decisions and if we get a little bit more confidence going in them because of this stimulus package from Washington, perhaps that will stimulate some confidence level from the consumers and corporations. Bob: Absolutely, because so much now Pat, for the first time in history we’ve seen productivity actually go up in a recession because firms are laying off people faster than they’re loosing their sales. People are so scared right now, they are anticipating bad things and— Pat: that actually hasn’t happened yet. Bob: that hasn’t actually happened yet. Pat: Yes, and that’s the kind of, sort of confidence viral that can really bring you into deflation area, a bit of nastiness and that’s what some of the package like this might hopefully avert. Bob: Exactly. Pat: That’s a positive note to end on. Thanks Bob. Bob: Thanks Pat. Pat: I'm Pat Dorsey and thanks for watching.