I am thoroughly annoyed by the economic stimulus package that has been "sped up" in reaction to our economic plight.  So the treasury department will be minting money a few weeks earlier than originally planned.  Does anyone really think that this is a good solution to our economic woes?  Will giving families of four up to $1,800 in additional spending money do anything to help resolve the real causes of our economic problems?  Aren’t we forgetting the key economic principle that in order to have the promise of real economic growth you also have to allow for real economic contraction?  Isn’t this simply what we are experiencing?  Economic contraction and the natural and healthy economic result to our past mis-behavoriors?  The orgy in real estate is over.  Sorry America, but annual property value increases of 10%+ is not sustainable.  The credit markets got overly lax in their lending behaviors.   Homebuyers got overly greedy in estimating the amount of house they can afford.  Sorry America, but annual household income of $65,000 is not sufficient for that $400,000 home.  The news flash reads: foreclosures are up 40% over last year.  Why is this a surprise after years of headlines like: "property values up 15% from prior year" "new home sales up 20% over prior year" "Americans have a negative savings rate of 10% (i.e. we send $1.10 for every $1 we earn!)". 

 

The economic stimulus package is also designed to offset the impact of high gas and food costs.  Will it help offset the impact?  Yes.  Will it do anything to normalize the pricing of these products?  Absolutley not.  Simple economic principles tell us that when you increase demand, price goes up.  When you start making gasoline out of corn, the price of corn goes up.  We eat things that eat corn.  Our grocery bill goes up.  This should not be a surprise!  This problem is still going to exist long after we’ve spent our "stimulus" money.

 

I won’t pretend to fully understand the economic or political forces that have created the environment in which we live.  Lets get one thing straight, however.  The only action the provides any sort of economic stimulation is if we collectively SPEND the money. For a country that has a chronic spending problem that borders on epidemic greed, I don’t think that giving us $1,800 and sending us to the mall or Best Buy or on vacation is going to do one thing to resolve our deeper perceived issues.

 

I’m a tough love economist.  Market forces are punishing our collective mistakes.  When behaviors are re-aligned, the markets will normalize and growth can again be achieved.  We are like misbehaving preschoolers in need of an economic time out.  Its frustrating to see meaningless and very costly solutions thrown out in lieu of letting the economic forces that created the problem resolve the problem over time.