How Government Spending Stimulates Private Investment
We can all agree, Democrats, Republicans, and Independents alike, that our economy is in bad shape right now. Businesses are laying people off because profits are down because no one is buying anything. The big question before us, and the subject of the most vigorous debate in Congress and across the country has been, What do we do about it? Again, we generally agree that what needs to happen, the thing that will truly bring us out of this downward spiral and put us back in business, is to get private investment going again. The question is how to do that. Although it is a bit of an oversimplification, the heart of the debate is over whether government spending is a better means to spur private investment than corporate tax cuts.
I'll hold off on that for a moment to stress that we are talking about corporate tax cuts. The American Recovery and Reinvestment Act of 2009 (HR 1) that we just passed contains a number of tax cuts for working men and women and for seniors. Indeed, the "Making Work Pay Tax Credit", which would provide tax relief to 95% of American workers, has always been a central part of the plan and for good reason. Consumer spending is a big part of our economy, and putting that extra $800 in the pocket of working families, those making less than $200,000 per year, will help those families get through these hard times and help our economy at the same time. The tax cuts for senior citizens and those on Medicare will do the same thing, and those tax cuts were always a part of our plan.
As I said before, it is corporate tax cuts that have been offered as an alternative to the government spending projects contained in HR 1. In good times, when the economy is rolling, the argument can surely be made that cutting the tax rates for big corporations will lead to investment as these companies build new factories or stores to manufacture or sell their merchandise to eager customers. But these are not good times. Because of all the contractions in our economy, once eager consumers are cutting back on their spending and demand is falling. Even if a company believes that now would be a good time to open a new factory, it isn't likely to get a loan because the bankers don't like the looks of the economy. All that a corporate tax cut is going to do, then, is leave these big corporations and banks sitting on more cash as they wait for a more favorable economy in which to invest. While they wait, the recession continues.
But how can government spending help? Well, not by replacing private spending, that's clear. No one who understands the massive size of our economy thinks that government can spend enough money to keep it running, and that's not what we're trying to do. What the government can do, what we must do, and what HR 1 will do is reinvest in our country to spur the private spending we seek. Businessmen are too scared to spend their money and bankers too scared to lend because they both worry that nobody will buy. But the federal government has confidence in our economy. If a construction company gets a government contract to build a new school, they know that there's money out there. When they go to their banker for a loan, the banker can anticipate a return on their investment. So All American Construction Company gets their loan and they're in business.
When All American buys supplies from the lumber yard and the hardware store and the electronics shop, those companies are back in business, too. They can go to their bankers for loans and expect to get them. It also means that these companies don't have to lay off John or Mary or Angela or Bob, because they need workers to build the school, cut the lumber, make and sell the hardware, and the like. And John, Mary, Angela, and Bob all get their paychecks, which they can spend on groceries - keeping the store clerks, farmers, and truckers in business - and rent. That's what economists mean when they talk about a "spending multiplier". The same $100,000 construction contract spurs jobs at All American, the hardware store, the grocery store, and on and on and on. (Economist Brad DeLong offers an excellent explanation on his blog.)
So that's why and how the government spending in HR 1 can help stimulate private spending and get our economy back on track. Now, it is true that we must pay for this spending by further borrowing and, while the international uncertainty means that we can borrow at very low interest rates, that is a legitimate concern. (I would mention, though, that the tax cut proposals would require borrowing, too. The DeMint amendment, which would have replaced all government spending in HR 1 with tax cuts, would cost an estimated $3.1 trillion dollars.) But that concern can be overblown. In the 1930s, President Roosevelt heard cries that it would take generations to pay off the debt run up by his spending, yet the 1950s witnessed the greatest prosperity our nation had ever seen.
The simple fact is that sensible borrowing can be the best decision. Think of a farmer taking out a mortgage to repair his tractor: sure, he's going into debt, but a working tractor will allow him to make the money to pay off that debt and still turn a profit. Without that mortgage, his crops would be lost and he would be in much more trouble than if he just had to repay a portion of his profits to the bank.
So, that's where we stand with HR 1. There are things I wish had been included in the final bill, things we had passed in the House originally and some that we didn't, but this bill is a good bill. It makes sensible investments in our country and in our future. To get through these hard times, we need to work together, every one of us, as a country, and this legislation is a solid foundation on which we can build.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
A true perspective on money is so distorted right now! Anyone who makes decent money tends to think that a few hundred dollars will change someone's life.
- $800 is LOW for ONE car repair.
- $800 is HALF a new dental crown, WiTH insurance.
- MOST Americans OWE OVER $15,000 on unsecured credit! $800 can cover about 4 monthly payments. With barely a dent in what's still owed...
- $800 won't fix a roof leak or even a burst pipe.
- $800 is about 1/2 of ONE average mortgage or rent payment.
- $800 is slightly more than one month of Social Security for many of our senior citizens.
- $800 is two or three months' of groceries for an average family, sure.
How is that life-changing? This is a quarter tossed at a homeless person. This is a joke.
The modest tax cuts are only a small part of stimulus. Not intended to give us big money. Just to help out a little bit.
PLUS
But, perhaps we are missing the point. $13/wk times at least 50 million taxpayers who will receive it will put 650 million per week into the economy or 2.6 Billion per month. It is just a small part of the overall package to help the economy.
So I guess all of you nay sayers would rather have had the government go with the 3 trillion dollar corporate welfare scheme so those companies could make more jobs in China and their CEOs could keep making billions while the former middle class slides closer to poverty.
It's obvious that none of you has ever done without lunch so your kids could have lunch money, let skipped the refil of your meds because one of your kids needed an antibiotic, let your phone be disconnected because you couldn't afford it and the electric bill.
That $1.85 a day could prevent a parent from having to make those kinds of choices.
And NO not everybody who's having it that rough is on some form of government assistance. In fact, there are more working poor and unemployed people with assets (ie: a few acres of land or an IRA) that they haven't yet had to sell or cash out to live who are barely getting by but don't qualify for any assistance than there are people on assistance. There is just no roll or accounting of them.
Maybe the $1.85 a day won't even buy some of you your morning frappuccino, but for some people two days worth will buy them enough ground coffee to last a month.
so you can eat on 1.85......
I do have issues with the stimulus package, but mostly with some of the targeted initiatives. Upgrading federal bulidings is necessary and can be accomplished during "normal economic times", but not nearly as important as providing heat to thousands of homes that will be cold tonight because the families had a choice to make, food on the table or pay the utility bill. This during one of the coldest winters in a decade in some parts of the country. Regional and inter-city high-speed rail service is a great initiative, but not nearly as great as providing shelter for whole families living out of their automobile or literally on the street while this country is experiencing a surplus of empty houses. The elderly, democrats, republicans, and independents forced to choose between life-saving medication, food, or the utilities. It seems to me Congress and Main Street have lost the capability to identify and prioritize needs. Basic needs that people must have in their daily struggles to subsist. We must create new jobs now and retain the jobs we have. The high-speed rail initiative will not create any meaningful jobs this year, maybe not next year. Empty stomachs hurt today, people are cold tonight, the elderly and children need their medicine today. Come on America, let;s do the right thing, let's do it today.
REAL ECONOMIC STIMULUS:
Cut the payroll tax for 12 months. That will put real money into the pockets of American workers. The average American worker will get $73 per week. And save employers money on their employees and allow them to perhaps hire more. A self employed person could see up to $15,000 more take home per year! And, it will benefit the most those who earn under $100,000 per year. We have seen how centralized government planning works. Put the people back to work! Let them spend their money and buy goods and services. Get America moving.
HuffPost, don't suppress free speech. Be willing to present all sides of an issue.
Historically, tax cuts alone do not work during a severe recession. 1955, 1974, and 1982 attest to that. People pay bills they already have or save it for fear of even worse times. We already know that that's what happened to the 2008 tax rebates.
No business owner in his right mind will create jobs just because of a tax cut if demand and spending for goods and services is not there.
Unfortunately, the U.S. economy depends much more on consumer spending, approximately 67%, than any of the other G7 nations.
How is "making work pay" going to work if you are in fact not working?
So if I work as a construction worker, lumber yard worker, banker or contraceptive maker, I'm gonna be fine. If I dont, I'll have to stretch that $1.85/day tax cut. THANKS ALOT!!
laughing..
Government Spending Stimulates Private Investment. OK, let's see if you really believe that.
I am more than a little upset with the auto industry bailout, I have been since late November when the original $34B bailout was proposed. Did that government spending stimulate private investment? The initial $17.4B bailout failed and the next one will as well BECAUSE you did not get Main Street to invest in the industry.
Have you ever considered nationalizing the domestic auto industry? Bankruptcy is clearly not an option, instead it is a failure and will be the vehicle that drives this industry to the cemetery, never to be resurrected. If you want to save this industry, nationalize it now and allow Main Street the opportunity to revitalize it as the new industry owner. We will re-tool, restructur
keep your nationaliz
With all due respect, I will continue to argue nationalizing the domestic auto industry is the only way to save it. Your mantra is patently obvious, destroy the unions at all costs, the well being of this country notwithstanding. My family owns two businesses, both are non-union operations. I have no personal loyalties to unions, on the other hand I do not oppose unions. What I do oppose is allowing a vital industry to fail when it can be saved and restructured to once again become an icon of American manufacturing prowess. A total collapse of this industry will displace up to three million workers, union and non-union, democrats, republicans, and independents, most of them Americans. If we allow our ideologies to blind our rational thoughts and do nothing to prevent a tradgedy that is unfolding before our eyes, we have failed as a country and as a people. I refuse to accept that approach as irrational. So, I will continue with my mantra..NA
Wow! It's a good thing you voted for it then. Huh?!
HuffPost's Pick
$13 DOLLARS PER WEEK
I have heard members of congress, talk show radio and TV personalities comment negatively on the size of the middle class tax cuts in the stimulus package. One well known TV personality sarcastically commented that thirteen bucks might buy you a giant hamburger once a week.
I was amazed that these individuals DO NOT KNOW WHAT $13 PER WEEK WILL DO for millions of less fortunate Americans?
It will allow some to buy the proper amount of baby formula and baby food.
It will enable some to buy cheap lunch meat, snacks, and fruit so that their children will have a decent school lunch.
It will purchase gas for an unemployed individual to afford to driving around looking for a job.
It will enable some to buy a few extra articles of school clothing for their not so well clothed children.
It will enable some to meet their co-pay on their blood pressure medicine so that they can take it every day instead of once every three or four days.
It will enable some to move their thermostat from 58 to 62 degrees so that they will only be cold instead of really cold.
It will enable some to buy a book or two for their pre-school children to stimulate interest in reading and education.
It will enable some to pay for their bus or subway ride to their not so well paying job.
wow a whole 1.85 per day.......
Wow. $13 a week is $52 for 4 weeks (less than a month). And that will only pay for HALF a dinner out? So you spend OVER $100 for dinner? No wonder you don't get that for $13 a week, or $more than $600 a year will make a difference to poorer people. $600 pays for my auto insurance for a year. $600 is almost a moths rent. $600 is enough for a nice suit and shoes for job interviews. $600 is enough for a decent short vacation. It's enough for going out to a movie once a week.
So if you are "laughing" at $13 a week, YOU "have more trouble than a lack of 13 dollars". You have lack of compassion.
$13/wk = $52/month
Even with a decent middle class income, I appreciate that because:
----It will more than cover my monthly life insurance bill OR
----It will more than pay for Medicare Advantage supplement($38) for both my wife and me for the month OR.
----It will more than cover my copay for two prescriptions on the 90 day rate OR.
----It will more than pay for trash service, newspaper, and internet service for that month OR.
----ETC...
But, perhaps we are missing the point. $13/wk times 50 million taxpayers will put 650 million per week into the economy or 2.6 Billion per month. It is just a small part of the overall package to help the economy.
-For those who can't afford baby formula, diapers for their baby, those things are already paid for by the government. The same for their kids lunches.
-And unemployed receive unemployment.
-Books are free at the library.
-Most low wage earners receive the EIC so they don't pay any taxes, but actually receive a check from the govt.
I agree something needs to be done, but this is a joke.
Please reference the comment with Low and Lower Middle class incomes and not with those that are on welfare
So do you have to be in "THE UNION" to get all these new jobs? Have you ever tried to get a job without "Being an union member"? They laugh at you when you apply...Se
i got rid of the union in my shop......
I don't understand why the private banking system is in such bad shape. And I don't want the government to become too heavily involved in the economy. But let's face it, whatever the causes, our nation's economy is simply not performing right now. I must admit I'm surprised. But it's a fact, and I think most Americans understand that all too well right now. In this crisis, government involvement should help, especially in spending money that should be spent anyway (e.g. to rebuild crumbling infrastructure, modernize our energy grid, build high-speed rail lines and mass transit to ultimately reduce our transportation costs). We also need a "grand bargain" in the future that bring deficits down, perhaps by raising the Social Security retirement age gradually. But right now, hundreds of thousands of people are losing their homes, literally being thrown out into the cold. We really need sustained government action,not partisan bickering. Obama really cares; I hope other politicians will want to be like him in this regard.
No one is "literally being thrown out into the cold". People are going from paying a mortgage, to paying rent. Which is probably what they should have been doing in the first place. Obama, just like all of these other politicians, only cares about getting elected and helping those who help him. He doesn't care for the average person.
OVER 50% of the voting public voted for him. Seriously, SOME of us must be the "average person".
You must be logged in to comment. Log in or connect with
