American Recovery and Reinvestment Act?

The American Recovery and Reinvestment Act, commonly known as “the Obama stimulus plan” or “bailout plan” got signed into law recently, after weeks of haggling in the House. The stimulus plan has a total price tag of $787 billion, and represents 5.5% of gross domestic product (GDP), although its impact on the economy may be less and will be spread over several years.

The bill can be categorized into 3 major parts with a common goal of stimulating the economy:
1.        Direct payments to individuals
2.        Federal tax cuts
3.        Purchases of goods and services

Outlining some parts of the bill as follows,

Direct payments to individuals:

  • $41 billion to extend through December, 2009, the extended unemployment benefits program that was scheduled to begin phase-out in March; increases jobless benefits by $25 per week; includes a temporary suspension of taxation of certain unemployment benefits
  • $14 billion in special one-time payments to recipients of Social Security, SSI, and disabled veterans

Reductions in federal taxes

Individuals:

  • $116 billion for a refundable tax credit of up to $400 per worker ($800 filing jointly), phasing out beginning at $75,000 of income ($150,000 for joint filers)
  • $15 billion expansion of the Child Tax Credit
  • $70 billion for a one-year extension of the Alternative Minimum Tax patch
  • $14 billion partially refundable $2,500 higher education tax credit
  • $6.6 billion for an enhanced tax credit of $8,000 for first-time home buyers
  • $5 billion for extended bonus depreciation and increased small business expensing for capital expenditures in 2009
  • $20 billion in tax incentives for renewable energy and energy efficiency, including cost of renewable energy facilities, energy efficient home upgrades, purchase of plug-in hybrid vehicles

State and local governments:

  • $22 billion for new bond program for school construction, rehabilitation and repair, and private activity purposes

Purchase of goods and services:

  • $87 billion in matching Medicaid payments
  • $30 billion for power grid improvements, advanced battery technology, and state and local government energy efficiency improvements
  • $15 billion for scientific research
  • $7 billion for broadband services to underserved areas
  • $19 billion for improvements to healthcare information technology
  • $25 billion Cobra subsidy for nine months
  • $54 billion State Fiscal Stabilization Fund for schools and public safety
  • $13 billion for Title I education grants
  • $12.2 billion for IDEA education grants
  • $29 billion for road and bridge construction
  • $16.4 billion for mass transit
  • $18 billion for clean water and flood control

So what can one say about this? When life was good in the American economy people generally spent money without thinking too much about it, pretty much spending money that was not really theirs to satisfy cravings that could have been subdued by discipline. Then a brief slowdown in the economy gave rise to the credit crunch, and then folks began to realize that money can’t be spent on every whim, because it wasn’t as freely available as it was. Now this plan suggests that the broke US government in debt to the tune of about $12 trillion wants to add another $1 trillion in debt to its books, with the hope that spending this “non existent” money, will help revive the economy. In other words let’s do what we did to get us in this mess to get us, only we’ll do it on a much larger scale. This thought process embraces the idea that if it was not really worth it before because it was stupendously expensive in the boom years, it is absolutely necessary in the contraction years, and we need to keep the price high still. Like everything that goes in simple into the House, it comes out much more complex and filled with pork, the bailout plan went in at approximately $700 billion, and came out closer to $1 trillion.

Going back to some basics in fiscal policy, the government can only raise money by:
1. Taxing it
2. Printing it

Now because the government is not a “for profit” organization and merely a regulatory one, ideally it has no business interfering in markets. However Keynesian economist believes that in times of economic contraction, the government ought to spend its way out of the contraction. Everything we see around today are evident of Keynesian economist in Washington. Are they wrong? I don’t know, but they do have a lot of excesses that don’t make sense in my basic understanding of free market capitalism.

With all that said, back to the issue, so this Act proposes to cut taxes and print more money, the first will create further deficit (make the broke government more broke) and the second will cause mega inflation (except you believe the government will print just enough money that the economy needs to be “stimulated”).

So the point of this Act is to facilitate spending, and get people back in jobs, which makes sense, but do the benefits outweigh the cost? I don’t think so. I believe these economists are acting like the economy should grow forever. The economy had grown malignantly in the past couple of years in a period of extreme prosperity and people developed bad habits, these habits are what the current recession is supposed to change, as well as clear all blocked atteries in the heart of the economy. Shouldn’t America allow the process of creative destruction to take place, given that America prides itself in her free markets? There have been extreme excesses in the economy that require an extreme contraction to clean up, should the big three really collect bailout money when they make CRAPPY cars? Should banks really get bailout money when they made UTTERLY STUPID investment decisions? Should consumers be given bailout for BAD CHOICES? Should pornographers be given bailout money because people are beginning to realize that they don’t need porn but their wives?

The system should clean itself up, and the government should do what it takes to make the process not as painful as it should be, but I don’t believe government should act like there’s something that can’t fail. Heck the system failed, why is that so hard to accept!

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