Feb 24, 2009

Stimulus Package: Bailout Breakdown

by Matthew Coleman

The ARRA comes in response to a Dow dropping further by the day and almost 600,000 jobs lost in January alone, according to CNN. Through the stimulus bill’s new and expanded government programs, President Barack Obama and a majority of congressional Democrats believe they can provide the economy with the strength to pick itself back up.

To accomplish this complicated goal, the government has committed $507 billion to spending and $282 billion for individual and business tax cuts. Theoretically, these programs will stimulate the economy by creating more jobs for the unemployed and by putting more money in people’s wallets to spend. Similar to Franklin Roosevelt’s New Deal plan from the Great Depression, the spending is intended to fill the void created by the economy’s current losses.

If successful, the bill could prove vital in training America’s future workforce. According to the New York Times, more than $128 billion of the package is earmarked for education and job training, and nearly

$16 billion of that will go directly towards increasing Pell Grants. Another $200 million is set aside for college work-study programs.
While the stimulus plan does have potential, there is some debate regarding whether the bill is as promising as President Obama and his supporters believe. Over 200 renowned economists have signed a letter opposing the package, according to the Heritage Foundation. Clearly, there is serious disagreement as to the usefulness of the stimulus plan, and many are voicing their concerns.

“I think that the stimulus will probably not have very much, if any, of the intended effect,” Economics Professor Robert Rencher said.
The Wall Street Journal predicts that most of the dollars being used in the stimulus will not see the light of day until long after the economy has recovered from its weakened state. Many of the government funded programs proposed in the bill, like road construction and bridge repair, can take years to plan and implement.

“Large-scale construction projects of any type require years of planning and preparation,” Peter Orszag, the President’s budget director said, according to the Heritage Foundation. “Even those that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”

Funds acquired from the stimulus will also be used to aid companies, like Chrysler or GM, that are currently careening towards bankruptcy. President Obama believes it is essential to keep certain American based companies afloat, even if they cannot compete in the current market. Until this new stimulus bill, America thrived off of the free market economic system. Whichever company provided the best goods and services at the best price survived while the competition did not. The socialistic overtones of the bill, which signal a sharp departure from capitalism, are what many find alarming.

“What we’re talking about is basically the socialization of the country,” Robert Mateer, a finance professor, said. “The government will make an effort to make sure that everybody continues to have a job, even though the job makes no sense because competition
elsewhere could do it cheaper.”

Following the popular European model, President Obama and congressional leaders believe that the government should decide how companies are run, and which companies should not be allowed to fail. If a company like GM begins to falter, then the government will make up the difference with the taxpayer’s money to keep them afloat, according to Mateer. This policy has the potential of removing the need for companies to compete with one another to provide the best product for customers. If the government is willing to bail out any and all faltering businesses, there is no reason to adapt to the market’s changes to provide a better product or service.

Another issue concerning many Americans is that very few members of the public actually know how the bill is going to help them and where their tax dollars will be going. To make matters significantly worse, almost none of the members of Congress who voted for the bill even had time to read through the 1,100 plus page stimulus package, according to Mateer. No one person oversaw the complete construction of the bill, and no one person can honestly say that they know where all the money is

“Literally no one read it all. It was impossible,” Mateer said. “You could not read it (all), and you could not understand it.”

Many Republicans believe that this general lack of knowledge regarding the destination of the stimulus funds has opened the door to many so-called “pork-barrel” or pet projects, according to Mateer. These pork-barrel projects are often slipped into bills to grease the wheels of governance and appease those senators or congressmen who may vote no otherwise. Given the immense size of the bill and the speed with which it was passed, there is really no way of knowing if all the money in the stimulus bill will actually serve to stimulate the economy.

A week has passed, but speculation remains about the bill’s effectiveness. However, some lessons can be taken from past trials and events. Looking back at America’s post-1930s history, no recession or depression has ever been fixed by government spending, according to Rencher. The Great Depression was not halted by Roosevelt’s New Deal, but through the start of World War II and the necessity to build war materials. Ronald Reagan fought the crippling recession during the 1980s by cutting taxes, not increasing them to fund government programs. John F. Kennedy also cut taxes during his administration to help rebuild a faltering economy.

Japan faced a recession similar to America’s current predicament in the 1990s. Over a 10- year period, their government launched eight separate stimulus packages and none significantly improved Japan’s economy. After all the spending and government projects were complete, Japan’s economy remained flat.

This series of historical happenings has left many wondering if it would be a better idea to put money into the hands of the American consumers rather than the Washington politicians. But Obama, a majority of the Senate and a majority of Congress feel otherwise.
“(I think) Obama comes from a very liberal, almost socialistic viewpoint,” Rencher said. “And he firmly believes the country will be better off if the government is more involved in things.”

In addition the stimulus package, a $50 billion plan to assist the troubled housing market is expected to be unveiled this week and Treasury Secretary Timothy Geithner recently proposed a $2.5 trillion proposal to right the flagging banking industry.

***Special research by Mitchell Malcheff, Graph and Graphics by Alex Towers


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