Sunday, September 23rd 2018

The Stimulus Package Effect - US Government Takes What It Gives


Friday, February 26th, 2010

 

With all the talk about the stimulus from one point of partisan politics of having no significant effect and the other pointing to the Congressional Budget Office finding that the Act has saved or created as many as 2.4 million jobs seems quite a stark contrast on who to believe.

By looking at the various aspects of the stimulus package including tax cuts, infrastructure and unemployment benefits, it was obvious the plan was aimed to help various sectors of the economy simultaneously. Some Keynesian economists argued it makes perfect sense in a deep recession as we have right now to do this while Austrians economists argued the debt created would hamper the economy even further.

But there is one problem that many outlets have not covered.  Joe public seems to think that for some reason that the 787 billion could disappear into thin air and is somehow "wasted" or gone for good. That is completely untrue but to illustrate my point ill emphasize it in the various aspects of the package below.

Tax cuts: This has the initial multiplier effect of extra money peoples pay packets and some percentage of people will actually spend this money in the economy with the flow on effects going to business(they may sack workers if demand keeps falling without stimulus) and then back to the government via sales taxes. Some may argue they it may pay off debt and others will save it. Both of those scenarios are a good thing in the longer term anyways, they will EVENTUALLY spend it back in the economy.

Infrastructure: This is a direct employment measure set by the government to create demand by fixing existing or creating infrastructure. This will create employment, even temporarily which will have the multiplier effect on not only hiring staff for projects, but support industries benefit such as suppliers and even local hospitality. Something forgotten is hired workers wages will be taxed back to the goverment via sales tax, income tax and other taxes.

Unemployment Benefits: Its hard to understand why anyone would be against giving money to people who require it desperately but as per the tax cut example above they would likely either buy a good or service, pay off debt or save it.  This also has similar multiplier effects as tax cuts.

The most important thing to consider is any new hires or "job saved" would actually have to pay income tax and likely sales tax back to the government. The businesses who have gained from the stimulus would likely have to pay taxes as well. So out of the 787 Billion it would be likely that some would come back to the government.

Whether it has the desired effect on the economy or not one thing is important to remember is 30% or so of the stimulus is in tax cuts and it is going back to the people who gave it in the first place. So in a sense those who say the government would "waste" this money shows a bit of irony since the public is in control of a significant portion of the stimulus.

 



Article by James Jones

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



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Tags: stimulus, stimulus infrastructure, stimulus package, tax cut, us stimulus

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