What really is the Stimulus Plan?

In order to avoid the recession to linger for years, the US government has announced a stimulus plan (American Recovery and Reinvestment Plan) of $819 billion, that would be invested in diverse sectors. The idea is to create more jobs in these industries, thereby jump starting the confidence and trigger spending from the consumers. But, is economy so simple to just pump in money and avoid a recession. To understand this, lets look through a brief history of this stimulus plan.


Why Stimulus plan?

During the great depression in 1930s, then president Roosevelt introduced a series of spending initiatives named 'New Deal', aimed at creating more jobs and recover the economy. These initiatives helped to create more jobs at the time when the nation unemployment was at 25%. More than the actual benefits, it raised the confidence in the consumers mind. Some of the programs that were created through the 'New deal' is still existent. Social security system, Security Exchange commission and Fannie Mae were part of the initiative. Arguably, it is believed that these programs helped US to get out of the recession. So, following the same policy, the current government also introduced the same kind of stimulus plan to stage a recovery. This model is called 'Keynesian economics'- which is named after the economist John Maynard Keynes. Its an economic theory which advocates government intervention, or demand-side management of the economy, to achieve full employment and stable prices.

Unfortunately, the government is left with no other option than injecting money through these plans. The only other way which will encourage spending is to reduce the interest rates, but that is not possible now. In December 2008, the Fed reduced it rate to almost Zero and there was no positive effect.

What is the criticism about the plan?

When the stimulus plan was brought to congress for the approval, the Republicans voted against the bill. Some of the reasons were that, the plan has lot of investments which would not really create jobs. Eg: Investment in arts, Global climate studies etc. They propose to setup a new bill with better spending areas, even if takes more time to draft one. However, they support the tax cuts for the individuals proposed in the current bill. Nevertheless, the democrats has the house majority and the bill was passed.


Risks in the stimulus plans:

Though there is no better alternative to stimulus plan, there are risks involved in it. Since the US just needs more money for these plans, this huge amount adds to the already debt deficit US, which would come to 60% of its GDP by 2010. At the same time, it should pay off the interests to the foreigners who brought its treasury bonds. Remember, just printing more money would lead to inflation. Also, it will further reduce the value of the dollar in the global market. In order to avoid all these mishaps, the stimulus plan should work as expected and once the economy recovers, the government should align its economy more towards 'saving money' and produce more goods. Else, it wont be long enough before the dollar loses its sheen in the global market and the Euro could take over the position.

What if the Stimulus plan works too fast?

When the world economy started de-stabilizing in 2008, international investment poured into US treasuries and bonds. So if the stimulus works faster, then there will huge flow of money supply leading to inflation.


Indeed, its a tricky situation. All US needs is to boost the economy by bringing in confidence to the consumers. At the same time, the market should be regulated to avoid any unforeseen crisis that may occur due to any sporadic economic activity.

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