Flawed Plan Relies on Consumer Spending

After President Obama signs the controversial stimulus plan, which will add on average $8 per week to most paychecks, his administration will have to cross their fingers hoping Americans will spend it all, as they normally tend to do.

According to the Wall Street Journal article Plan Tries Slow, Steady Stimulus to Revive Spending the idea is to let money trickle out to consumers so it feels like a permanent income boost.  When the government sent lump-sum checks for the 2001 and 2008 stimulus packages, Americans stashed most of the cash in savings or paid off debt.  Neither of those actions fulfills the goals of a stimulus intended to offset weak consumer spending.

Coincidentally, last week, I had a brief conversation with “Sarah”, our office building concierge, and discussed how we spend our coffee shop gift certificates.  While I told her I’m very conservative in buying one cup of coffee at the time, she says she spends the entire card quickly buying all types of elaborated beverages, because she feels “it’s free money.”  Thus, the Obama administration is hoping for more Sarahs and less Silvias in the economy to make their plan work.

It is true.  One of the biggest components of the country’s GDP is consumer spending, but part of the current financial debacle is precisely caused by irresponsible spending from some American families who purchased homes for $500,000 despite joint incomes of $40,000.  So, I’d be cautious in trusting the spending factor to boost the economy.  I liked Obama’s original $1 trillion infrastructure plan, which was going to create jobs at home instead of overseas, where the clothing that Americans buy is made – especially from China.  At the time this infrastructure-heavy plan was discussed, mining analysts told me that a boon for U.S. jobs would certainly be a consequence.

Nonetheless, this spending experiment is being launched in the midst of a crisis, with the highest level of unemployment rate of 7.6% in January, 2.7 points more than a year earlier, the largest annual increase rate since 1975, plus fears that the economy will worsen before it gets better, as President Obama himself previously stated.

The current plan focuses heavily on social spending benefiting the unemployed, which will only revitalize the underground or cash economy.  Unlike the original plan, which stressed more infrastructure investment, this new plan deviates from spending that could have a clear income multiplying effect and instead invests in nonproductive sectors of the economy.  And it counts too much on Americans spending their extra money, since some will save more.