Are we really stimulating?

I think its safe to say that the current state of the economy is most American’s number one concern, and it is certain the Obama administration’s greatest task at hand. With every fiscal and monetary economic tool at work, why isn’t this recession turning around? American’s are scared and short for liquid capital, and I think the new Obama stimulus package will not have the desired effect he wants it to and we will sink ourselves into a bigger deficit.

The taxpayer ultimately funds whatever government spends, so why would someone spend more money now when they have to pay higher taxes later. The Ricardian Equivalence Proposition is the idea that a tax cut or more money in a consumer’s pocket will not boost Consumption or GDP. This assumption assumes that the individual realizes the benefit of having more money now will offset with having less in the future, so they do not change their spending habits. If this is true, then why do we keep drafting up stimulus packages when this first one never even worked?

I think the government needs to take a step back and assess their role in this problem. The Federal Reserve has about done as much as they can, so it is the fiscal policy that will have to save this economy. Given the almost complete shift to a Keynesian approach, our government has to stimulate demand. Putting money into American’s hands, who already have mounting debt, only soaks up their own balance sheets, and does not get pumped into the economy. This same dilemma is happening with banks and large corporations who lend money and contribute to large purchases of capital stock, respectively. Right now there is no demand and thus no need for supply and employment, and that needs to change very soon.

I am not suggesting that Obama should create government programs similar to FDR, but government spending has to put people to work. If unemployment rising, there are less people with money, which means they will be buying less, and ultimately higher unemployment numbers. So, ironic as it is, I think we need temporary regulation in order to get us back to the free market we know and love. For the invisible hand to take over again, the money were spending has to put specifically guided into the economy or else we will continue to spin our wheels in this recession.