Over the next few months most of us will be receiving government checks designed to ‘stimulate’ the economy.   The payments, ranging from perhaps $600 to $1,200 per household and totaling about $160 billion, represent a considerable sum even to an economist.

It isn’t surprising that this fiscal stimulus package passed in an election year.  What is surprising is that it passed with the wholehearted backing of Federal Reserve Chairman Ben Bernanke, the former Princeton professor whose reputation was made as a monetary economist.  Fiscal policy has lost its luster these past fifty years, and Professor Bernanke is largely responsible for detailing its shortcomings.  It is worth revisiting the arguments.  

Fiscal policy is slow and clumsy (though technology does improve this a bit).  Fiscal stimulus policies involve either government spending of tax dollars not yet collected, or rebating of tax dollars already collected.  Leaving aside the obvious cost of a few tens of millions of dollars in government processing costs, this money wholly represents either a shifting of consumption from the future to the present, or from one group of taxpayers to another, or, as is the case in this package, both.  So, in order to stimulate the economy, we borrow from future taxpayers to distribute money to consumers today (without much regard for their having payed taxes recently).  This of course, should raise a few eyebrows.  For, if taxpayers are truly rational, then they must know that this stimulus package will be paid for by someone in the future – and that just might be you (unless you are in the bottom half of earners who pay no Federal income taxes). 

The question however, isn’t whether this is what happens (it is), but whether or not it is a good idea.  Let me explain.  

On the downside, a fiscal stimulus plan enlarges the government deficit, thus devaluing the dollar.  It also motivates consumers to spend, especially since about half the payments will go to consumers who didn’t pay any taxes in the first place (and so are unlikely to have to pay in the future).  This reduces savings, which also devalues the dollar, and increases the trade imbalance.  It also runs the risk of unintended consequences.  If it comes too late, it may simply lead to inflation, thus reducing the future value of savings (which in turn, promotes consumption, and reduces the value of the dollar, and increases the trade deficit). 

On the upside, monetary policy is tasked with a great challenge – to alter consumer perceptions about the future, while simultaneously making adjustments to the present.  Fiscal policy may make monetary policy easier to implement by increasing optimism during uncertain times.  Also, fiscal policy permits the targeting of payments to different groups of consumers – such as the poor and elderly.  This may mitigate the ill effects of a recession on the most vulnerable.   

In the end, this is a low cost effort and the greatest risk is to weaken Ben Bernanke’s reputation.  He may be wrong, but he is no coward. 

Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.