Is It Still ‘Stimulus’ If It Takes Five Months?

With all eyes suddenly on the economy, thanks in large part I am convinced to the extra hyperbole produced by a presidential campaign, there is much talk now of what sort of government “stimulus” package may be offered. Without debating the value of Fed vs. legislative interventions, and without debating the potential long-term ills caused by such short-term interventions, let me just point to a pair of articles in today’s Wall Street Journal that, in a small way, show why such a stimulus is bound to disappoint a lot of people:

David Wessel, in his “Capital” column headlined “Speed and Restraint Are Crucial” (gated, but well worth a read), writes:

“To be effective and prudent — and it’s an open question how effective it will be — stimulus needs to be timely, targeted and temporary.”

A few pages later, in an article headlined “Taxman Could Slow Stimulus Plan,” Sarah Lueck shows why the “timely” part of the stimulus equation can be hard to achieve:

“Even if Congress meets its goal of finishing a stimulus bill before March, it is likely to take until June for the government to start sending out the millions of rebate checks that would be the plan’s centerpiece. It would take a couple more months before all the checks could be mailed.

The IRS — and its computer system — is focused on processing tax returns for 2007, and will be busy until May.

‘It is remarkable that the world’s leading economic power can’t get checks out the door faster than that,’ Peter Orszag, the director of the Congressional Budget Office, told senators at a hearing Tuesday.”


mathking

If a stimulus is to be effective, it needs to get money into the hands of those who will spend it as quickly as possible. This is why it is puzzling to me that they (the white house and congressional leaders) have taken extension of unemployment benefits and food stamps off the table. Those are two parts of the economy in which all or almost all the money placed will be spent quickly. So they have a better multiplier effect. Furthermore, extending unemployment benefits also tends to reduce foreclosures and sails at loss of homes, both of which would be very good things in this economy.

Infrastructure spending is not bad in terms of job creation, but the lead time between allocating funds and actually starting to create jobs is relatively long, so it is not as good a way to stimulate the economy. (I am for infrastructure spending, I just don't think it is the best way to stimulate the economy out of a recession or slow down.)

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Cindy

These law makers are stuck on the idea of a separate rebate check. Since we are all filing taxes anyway, why not just give us an extra credit of whatever amount for this year. So if you owe and use a credit card or debit account to pay, less will be drafted. If you pay by check, you will get a refund. If you get tax refund, your refund will be bigger. And finally if you don't file, you don't get anything.

bex

Use the Social Security Administration, instead of the IRS.

The SSA has better records on who makes what... and they could get the first round off to the elderly and infirm in a matter of weeks.

The rest of the folks will take a while... but they could easily start with the poorest and work their way up.

TheAsianEconomist.com

At least they are doing something and not just sitting back and watch the economy keep going downhill.

Consider the placebo effect of this "economic stimulus", people will see "hope" and when there is hope, everything is fine (for now), until the numbers comes out, then we have a serious problem on our hand.

Marc Brodeur

Historically, people do not spend lump-sum rebates like this one when there is a bad economic outlook. People only react to a change in income level (like a pay raise).

This is what the data showed from the Bush the Elder tax rebate. Consumer spending did not proportionally increase after the rebate.

JoAnne

I just can't figure out why they didn't extend the unemployment insurance 13 weeks, now. People are losing thier homes daily, this might have helped, it's just 3 months,Maybe take away Columbus day as a paid holiday for state and government employees.

Bill

Why not just send out gas vouchers? That's primarily where the $$$ will go any way :-(

Max B. Sawicky

Five months is no problem. The recession could easily be 12 months, and in the past employment growth and state government revenues are sluggish for a couple of years. Sooner is better than later, but there is still plenty of time to have an impact.

mike

Don't you think some people will spend the $300 once they hear that it is official? In fact, I bet some people will spend it now, and then spend it again in five months when they actually get the check.

I bet some payday lenders will gladly give the people their $300 now with 23% interest due when the check arrives from government. In fact, they may be the real winners here.

Barb

Anything the government does takes forever unless it's for their own benefit...

jon

I thought that the 'standard' way to stimulate the economy was for the government to start spending money on things, usually infrastructure.

This both gives the people jobs, and gets infrastructure built at times when wages are down (which is why the stimulus is needed), getting government value for money.

Will

While giving everyone enough for a new iPod or Wii will no doubt be popular, wouldn't the money be better spent on infrastructure? If the feds dole out billions on interurban passenger rail, the U.S. won't be so vulnerable to future oil shocks.

Gary

I think this could make for an interesting stock pick... if its a $300 rebate, maybe pick up nintendo (as the $300 would put it in Nintendo Wii or DS Territory), if $800, maybe a manufacturer of LCD or Plasma displays. It would seem the American consumer is dumb enough to splurge rather than save. For me? I'll invest my $300-800, I'll need it someday to offset the social security I'll never get, and pay down the debt burden our elected officials are piling onto my future.

ylight

I think you're way off the mark in saying that the focus on economic problems stems from the presidential campaign. The Presidential Candidates started focusing on it because, well, everyone all of a sudden seems to be thinking that we're heading into a recession. They're just following the polls on this one.

Ironman

There are four things that keep government officials (elected or otherwise) from being able to provide any sort of economic "stimulus" in an effective or timely fashion:

Recognition Lag: Politicians are often slow to recognize a serious slowdown in the economy.

Decision Lag: Deciding what to do after they recognize a potential problem slows politicians down even more.

Implementation Lag: Making what the politicians have decided to do actually happen takes more time. Typically runs anywhere from 1-8 months.

Effect Lag: Once the stimulus is in the economy, it takes time for it to work. Takes anywhere from 3 months to 1 year.

And that, of course, assumes the so-called stimulus is 100% effective at doing what it's intended to do: increase productive economic activity.

More on all these here, plus dynamic data and links!

Oh, and Max, whatever the NBER might even consider to be a recession will be over in either November or December, and possibly earlier.

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MachineGhost

The length of time required for "economic stimulus" to take effect matters less than that Congress would actually consider and pass such legislation. As shown many, many times historically, the market will discount such legislation, good or bad, long before it actually goes into effect.

BC Planning

This stiumulus will do nothing for me, if I have to wait until July to recieve a stimulus. My bills are due now, lol

Brian

Is It Still 'Stimulus' If It Takes Five Months? ... or if it ends two weeks after it starts? A one-time payment is not the way to go. Those who really do need it to help with expenses will instead blow it on furniture for the room that has been empty since the day they bought more house than they could afford. Those who don't need it will put it in savings. Now what?

Yero

Is there some sort of Prisoner's Dilemma / Nash Equilibrium problem to be found from the seemingly opposing ideals that:
1) The government says the rebate check will best help the economy (and thus, the people) if we all go out and spend it frivolously.
2) For citizens who are in debt (most of us), that money is best saved or used to pay down mortgage/credit card/educational debt.

If we all use that rebate to pay our credit card bills, the economy doesn't pick up. If we all spend it at the mall, we learn nothing about responsible spending.

Bill

We were at the bottom of the totem pole on when to receive the rebate. July 11th has come and gone and still no rebate. We did receive a letter from the IRS stating give it 6 weeks after due date before inquiring. Would that really do any good??????