Wall Street seems to be rising and falling as the prospects of another stimulus bill wax and wane. Before getting too excited, though, we should understand that a stimulus bill will not stimulate the economy. It can move money into needy pockets, but it won’t get to make the economy as a whole any better off.
Stimulus follows from the Keynesian idea that an economy can get stuck in a recession or depression. Businesses think they would hire employees if they knew that people would buy their products. Workers would spend money on products if they knew they would have work. But neither side is sure of the future, so they don’t hire or spend. In this model, a blast of government spending gets things going. Businesses see greater sales so they hire people, while people have jobs and thus spend more. After the stimulus or “pump priming” gets the economy into recovery, the government can cease its stimulus.
This story does not apply to the pandemic recession. A stimulus bill won’t boost sales at restaurants, hotels or airlines. Waiters, chambermaids and flight attendants won’t get jobs because of a stimulus bill. Pumps tapping into dry holes don’t need to be primed.
What a stimulus bill can do is move money from some people to others. So people who are out of work can get funds, either through outright gifts or extra unemployment insurance payments. Some people will have more while others have less.
Companies in certain industries can get subsidies, at the expense of the rest of us. But sending cash to airlines won’t make people comfortable flying. “Saving the industry” would save shareholders, creditors and some employees, but it’s not necessary to ensure the existence of airlines when people want to resume travel. New airlines will form if the legacy airlines have failed. Plenty of new airlines form every year around the world. If today’s major airlines all fail (which is quite unlikely), planes will be available, experienced staff available, airport slots available, and financing available if demand exists.
When a stimulus program moves money around, some people will have more and others will have less. This may seem strange given that there is no tax source for a stimulus program. The early stimulus program was run on a deficit, and no tax increase is in the cards, so where will the money come from? Government spending that does not come from taxes comes from either debt or inflation (with the inflation usually camouflaged as debt programs). Debt is a burden on taxpayers sometime in the future.
The other means of financing deficits is inflation, with the Federal Reserve virtually printing money for the government to spend. The purchasing power of our dollars declines with inflation, so the cost of stimulus is spread widely across the population.
Business impacts of a stimulus program depend on the business. Landlords of low-end rental housing want a stimulus program to help people who have lost their jobs. They are not motivated by altruistic visions of boosting the overall economy, just hopes that their own tenants will pay rent. Banks with large books of lower-end consumer credit also want stimulus, just to ensure their customers repay loans. Some industries, such as airlines and hotels, hope for direct benefits to their companies. Most Main Street companies, though, would see little impact from a stimulus bill.
Helping the economy is a false justification for a stimulus program. Helping some people at the expense of others can be debated. This justification relies on a philosophical position rather than an economic position. Economists can play a role in program design to assess the inevitable disincentive effects. Programs can be designed to target the needy more than the well-off. But if a stimulus program would really stimulate the economy, the details would not be too important. But details are critical for a transfer program, which a “stimulus” program in 2020 or 2021 would be. No economic stimulus would result from a stimulus bill.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.