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17 Economists on recessions, stimulation plans, and what they might mean to you
The media smells blood in the water.
With the frenzy surrounding a possible recession, the causes, and what the government should or should not do, listening to professional and academic economists is probably a good idea. (Personal finance bloggers’ commentary is also summarized below)
Economists tend to agree that we are in or are heading into a correction, recession, or economic downturn. But, they disagree as to whether the recession or downturn change will be severe or even a big deal.
Some economists argue recessions are a normal, inseparable element of capitalism. Others, like George Reisman, believe the primary cause of recessions, especially serious ones, is government intervention.
You might be surprised to learn that a popular definition for a recession is simply a period where the “real gross national product (GNP) has declined for at least two consecutive quarters.” Obviously, producing less is rarely a good thing, but a slight drop in production is hardly the harbinger of another depression!
Either way, the past century has seen large income gains and huge standard of living gains, so a little correction should not be too uncomfortable. Although almost everyone is individually doing well, apparently most people think everyone else is on the verge of financial ruin. Perhaps this belief is why congress is so motivated to act.
Some economists are concerned that the government’s response might be worse than the problem. Caution may be in order. Unfortunately, people seem to want the government to do something and November’s elections are just around the corner, guaranteeing the “stimulus package”.
Although many economists have come out against government action, not all attempts at economic stimulation are equal, effective, safe, or even work. A much wiser approach would be for the government to focus on policies that lead to growth over time.
Where is the sense in putting off positive reforms for a rainy day? “If a spending increase or tax cut isn’t worthwhile on its own merits then it’s highly unlikely to be worthwhile once we add in the benefits of ’stimulus’.”
How the recession and stimulus plan will affect you
For now, the recession will have little effect on most workers. Unemployment is at historical lows and more people than ever before have joined the middle and upper classes. Luxuries unimaginable to previous generations are now so common that they are taken for granted.
The stimulation package will affect people differently depending on their age and how they use the rebate. Since the tax rebate is being funded by more debt instead of a reduction in spending, the rebate is essentially a wealth transfer from future tax payers to us.
The money has to come from somewhere and our government’s debts will need to be repaid someday. If you are a younger worker or have children, you might want to think twice before frivolously spending your rebate check.
While rebates will likely have little to no impact on the economy, your decision to spend or save will play a large role in your personal situation. For example, a $1,200 rebate applied in the first year of a $200k, 6% mortgage could could trim five months of payments and save you almost $6,000.
Photo by Luca Conti
The personal finance blogging community has seen explosive growth in recent years. Personal finance bloggers tend to be prolific, often finding great tools like the rebate calculator Consumerism Commentary located. They also tend to be very open about their personal situations—both what has worked and the financial decisions that haven’t.
Many of the bloggers first look to their readers for answers before offering their own solutions. Some bloggers, however, are openly skeptical about a recession, stimulus, or government intervention. And now, the Canadian bloggers are even joining in the speculation!
Other bloggers are using polls to gauge readers’ opinions, no matter how crazy the opinions are. One of Joseph Sangel’s readers actually accused him of starting the recession!
Everyone seems to have advice on how to best use your rebate check. The advice ranges from smart & stupid ways to the bloggers’ personal strategies to best use their rebates.
Some posts address specific questions, while others take more of an analytical overview approach to the recession and stimulus package details.
Finally, many bloggers have avoided the topic, only offering a few quick thoughts that aren’t necessarily negative.
Perhaps the briefer posts inspired some of the proactive posts that offer advice on minimizing your exposure to recessions and hedging your bets just encase you become collateral damage.
For further reading about the “recession” and stimulus, check out The Hamilton Project’s If, When, How: A Primer on Fiscal Stimulus pamphlet. Or explore the personal finance blogs below.
To learn more about economics, explore the links above or read Russell Roberts’ excellent short novels on free trade and economics.
This article was first featured in the Carnival of Personal Finance hosted by Broke Grad Student and later appeared in the premier edition of Financial Tips Carnival hosted by Financial Tips.
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Four Pillars added:
February 20th, 2008
Thanks a lot for the mention!
Great post - must have been a lot of work.
Mike
Randall at CreditWithdrawal added:
February 20th, 2008
Very nice article, very informative and balanced. Thanks for including a link to my article.
My skepticism comes from seeing the same thing happen multiple times with no significant effects. I’d be pleasantly surprised if this incentive causes wider ripples in the economic world, but I wouldn’t count on it.
Brip Blap added:
February 20th, 2008
I agree with Mike - that must have taken a while to put together! Very interesting. Thanks for including a link to my post, too.
Steve
Early Retirement Extreme added:
February 20th, 2008
That has to be the best use of hyper links I have ever seen. Must have taken forever to work in.
Art Dinkin added:
February 20th, 2008
Very clear and concise. This is the best economic summary I have seen in a while which incorporates the national economy, government intereaction, and opinions on what it all means. You have done a great job of bringing many resources together. Thank you for including my post as one of those references.
Aaron Stroud added:
February 20th, 2008
@ Four Pillars, you’re welcome. You didn’t think I’d forget about our neighbors to the north, did you? Canada is full of some wonderful people (Les Stroud!) and beautiful natural resources.
@ Randall, thanks for dropping by and clarifying your position. I agree that this incentive will have little to no positive effect. Unfortunately, the rebates are not being paired with spending cuts, so there will be a long term effect. Every working American that makes enough to pay income taxes will be “sharing” in the interest payments.
@ Steve, it did and I feel it was worth the time investment. I’m glad you found it interesting.
@ Early Retirement Extreme, Thank you! And, yes the project often felt like it would never end. I included 39 links to pf blogs and 35 links to economics posts and articles.
@ Art Dinkin, thank you for the generous words. I’ve been chewing on these thoughts for awhile. In fact, I wrote the first half and then searched my favorite economics blogs for posts I remembered and posts to support my points. I think next time, I’ll keep a running list of useful posts to cite before I embark on another summary/overview article!
Tejvan Pettinger added:
February 25th, 2008
As an economist and personal finance blogger, I find this post interesting. Quite often there are misconceptions about economics; for example, non economists usually prefer to take a negative sceptical viewpoint. But, you will certainly never find agreement amongst economists!
wealthy_1 added:
February 26th, 2008
Interesting article. The way you linked to others’ posts was very clever and creative. Thank you so much for the mention!
Ken Forester added:
April 1st, 2008
You mention that unemployment rate is currently low and that should sound like a good thing. However, unemployment rates do not truly tell the whole story. Note that people give up looking for jobs if it becomes too difficult to find decent, well paying jobs, no matter what the government says about unemployment rates.
Reality today is that people are unhappy with their employment prospects, so either they have taken up low paying jobs to get by, or have stopped looking for work and hence the unemployment rate stays low despite problems in the labor market. So unemployment rates are are not good indicators whether more people will join the labor force or not.
A better barometer to judge whether more people will join the labor force or not really depends on their job prospects or job security. Scorelogix (www.scorelogix.com) Job Security Score (see job security entry in Wikipedia http://en.wikipedia.org/wiki/Job_security) computes job security based on economic conditions, including unemployment data, which perhaps is a better indicator of whether more or less people will join the labor force or not. Scorelogix Job Security Index is a good measure to gauge job security for the country and it has been awful for some time now and things don’t look too good in the near future. Everytime economy slows down or goes into recession I find the number of unemployed people I know spike whether or not unemployment rate truly reflects the extent of the problems people have in finding jobs.
Aaron Stroud added:
April 22nd, 2008
I realize that our unemployment rates are imperfect, but they are consistent and the unemployment rate show us near record lows. We are nowhere near widespread unemployment and any potential worker that can decline a job because it doesn’t pay enough or isn’t “decent” is far better off than people even a generation ago.
The view that people are unhappy with their jobs is certainly widespread among the media and some politicians. And I’m sure there are a few polls floating around that support the view that Americans are not optimistic about their job prospects. But according to Gallup, people are basically just as happy and optimistic about their economic prospects as they have been since 1979 (when they started polling on personal satisfaction).
The issue of job security is an interesting one. On one hand, we’d all like to control uncertainty in our lives. Especially when it comes to our jobs. But the decision isn’t simply between more or less job security. Instead, the decision is between more job security, but a less dynamic economy and less job security, but a more dynamic economy capable of driving costs down and raising everyone’s standard of living in the long run.
There will always be some people going through financial hardship as the world changes, but one thing is for certain. As long as people are relatively free to work and spend where they want, there will be plenty of opportunities to go around.
Mrs. Accountability added:
April 22nd, 2008
Mr. A and I have lived at poverty level many times in our lives so we wouldn’t be a stranger to it if things went completely belly up. Mr. A likes to do some stocking up on canned goods because it makes him feel more comfortable. I don’t mind, I just don’t like to talk about it too much for it tends to stress me out. Neither of us can believe the “stimulus” checks being sent out, can’t see how it is going to stimulate the economy - ours is the same amount as we paid on our income taxes, so when it comes back it will cover what we just paid out in taxes. Great post - I have only met you through the Festival of Frugality and got the impression all your posts were as link-intensive, but see from your comments they are not.
Aaron Stroud added:
April 22nd, 2008
Mrs. Accountability, thank you for continuing to explore my site. While I’d love to heavily enrich every post or article with links, the truth is they take too long to write. I will continue to write link-rich articles, but they will be in the minority.
You’re right to doubt the stimulus checks’ efficacy. The stimulus checks will have no meaningful, positive effect on the economy for two reasons. (1) The checks are a one-time shot in the arm. Businesses realize they’re only going to have one chance at the money.
(2) Where the stimulus checks come from also plays a role. If France or Japan decided to send everyone in the US a check, that would enrich us as a nation. Instead, the stimulus checks will be funded by a mix of inflation and federal debt.
The inflation is essentially a tax on our purchasing power and taxpayers are responsible for the debt, so the stimulus checks can’t have a long term positive effect.
Greener Pastures added:
May 5th, 2008
I enjoyed your article. It’s been chosen as a “favorites” in my “Blog Carnival Round-Up, Week of may 5th, 2008″ article, posted today.
Best, Lisa
Greener Pastures’s last blog post..Blog Carnival Round-Up, Week of May 5th, 2008
Aaron Stroud added:
May 6th, 2008
Lisa, thanks for selecting my article as a favorite. I’m glad you enjoyed it.