Economic Stimulus?

President Bush visited the Economic Club of New York on Friday, described the state of the economy as "going through a tough time," told several jokes, and promoted his economic stimulus package as one part of government's overall panacea for shoring up frightening statistics.

By now we've all been exposed to the various economic woes in America. Housing prices are falling, unemployment is rising, the stock market is down, gas prices are up, the value of the dollar plummets daily, gold prices are over $1000/ounce (and rising fast), consumer spending is down, and on an on. Some of the more bearish analysts are forecasting a deep recession rivaling America's Great Depression while defenders of the Bush Administration's policies point to production strength and export figures to buoy their arguments that the current recession--if they dare mutter that word--is temporary at best.

So how, then, do we know who's right?

I'm no expert in economics. I've only recently become interested in the subject, mostly because I wanted to better understand how money works. Little did I know that my initial curiosity would lead to such a complex rabbit hole of explanations and theories! My undergraduate degree is in math, a discipline similar to economics that certainly aids in its understanding. I will forever have a special place in my heart for anything dealing with numbers, graphs, statistics, charts, trend analysis, and (especially) logic. In undergraduate math, there's relatively little wiggle room when making your argument...and your logic is what counts most.

I think that's what frustrates me most concerning the analysis coming from the defenders of present economic policies: lack of logic. Every time I hear an ordained economic "expert's" explanation for the root causes of our present situation and his or her solution, I am left with more questions than answers. I don't gloss over and throw up my hands in defeat; rather, I'm genuinely bewildered, as in, "Wait, that's it? You haven't explained anything to me!"

This morning while walking to work I was listening to part one of the lecture entitled "The Great Depression, World War II, and American Prosperity" by Dr. Thomas E. Woods, Jr. Within the first ten minutes of the lecture, Dr. Woods gave a brief overview of the Austrian Business Cycle Theory (ABCT). Dr. Woods' explanation served as a template for comparison this morning while I read through the transcript of President Bush's speech at the Economic Club of New York. Sure enough, within the first few paragraphs of the Bush's speech (much of which is comprised of the same talking points I've heard countless times from economic experts on radio and television), the contradictions started to pile up.

First, there was Bush's statement that the economic stimulus package will help rehabilitate the unstable economy. The thinking is (if I interpret it correctly) that once the checks begin to arrive in mid-to-late May, consumers will be able to purchase more goods and alleviate debt. The increased consumption will breathe new life into our economy and everything will return to normal. Additionally, the stimulus package provides incentives for businesses to purchase new equipment. New equipment means job creation. This benefit is designed to combat rising unemployment figures.

Second, there is the bizarre notion that "good times and bad times" are an inherent part of a market economy. More commonly referred to as "booms" and "busts," these phenomena are generally accepted as unavoidable, even in America. President Bush briefly discusses booms and busts before covering the different elements comprising his economic stimulus package and its anticipated affects. It is important to understand that the net effect of "booms" and "busts" is an overall increase of prices.

Finally, President Bush outlines the government's role (and plan) in aiding various sectors of the economy recover from the present recession. These areas, President Bush notes, are in dire need of help...most notably the housing market. Bush praises the actions taken by Ben Bernanke and the Federal Reserve as well as Secretary of the Treasury Henry Paulson for their ability to anticipate the problem and act quickly to minimize its affects. Bush's implied message is that without the Federal Reserve and the Treasury the crisis would affect more people and be much, much worse.

Although I only listened to the first 20 minutes of Dr. Woods' lecture, the ABCT refresher helped me weed through the BS involved in Bush's speech. In order to debunk irresponsible claims such as the ones made above you must subscribe to the ABCT that the Federal Reserve creates "booms and busts" (as well as their residual consequences) by recklessly interfering with the market and inflating the money supply. By increasing the amount of money in the economy, the Fed sends misleading signals to entrepreneurs, causing malinvestment and unsound allocation of resources. This is the "boom" period. The "bust" period occurs when malinvestments are exposed and need to be liquidated, causing the economy to contract.

Make no mistake, our economy is in the "bust" phase of the business cycle. Malinvestments, especially in the housing sector, are being exposed, and irresponsible homeowners are watching interest rates rise--seemingly uncontrollably--in order to account for the inevitable economic contraction. Prices are plummeting, and people are being forced out of their homes. Government promises to help out troubled homeowners as part of Bush's economic plan, but will it be enough?

The better question to ask is, should the government help at all? My answer is no; I'd rather the government got out of the way and allowed markets to work. Government inaction would lessen the impact of financial crisis, allow malinvestments to be liquidated, prevent further mis-allocation of resources, and ultimately return the market to stable footing much faster than any government intervention can provide.

The basis of my argument is rooted in my (admittedly limited) understanding of the ABCT. The economic stimulus package Bush is promoting will only worsen the affects of the economic crisis by prolonging market corrections.

For an illustration of my point, consider the "rebates" the government will send out in May. These checks are supposed to alleviate economic woes by increasing the consumers ability to purchase goods and pay down debt. This "stimulus" will have the exact opposite affect. Where is the money to be used for these rebates going to come from? The Fed is simply going to print the money out of thin air and give it to you, the consumer. This practice increases the amount of money in circulation, creating another "boom" within a larger "boom," the end result of which is higher prices for you, the consumer. In short, you cannot combat higher prices by doing the same thing that increased prices in the first place: increasing the amount of money in the economy. If you think prices are high now, wait until the stimulus money works its way through the system!

The alarming fact about the Bush stimulus package is that it met very little opposition before being signed in to law. It goes without saying that politicians are not economists...that politicians exist merely to get elected and to expand government. The non-cynical side of me desperately wants to believe that the diverse schools of thought in economics influenced our leaders to pass Bush's stimulus package, but I think in order to subscribe to that theory I need to place an abnormal amount of trust in politicians. Instead, I think my cynical side wins out here: economic ignorance equates to (temporary) bliss, especially for politicians seeking re-election. In thousands of years of human history, no one has ever welcomed bad news. And no politician desires the role of messenger when the crisis becomes more pronounced.