Citizen at Large: The Approximately $800 Billion Stimulus Package

All the talk of the impending ~ $800 billion stimulus package has stirred up discussion about what are our town’s “shovel-ready” projects that could be funded by mere millions from this potential federal payout. Our local newspaper listed the top ten most expensive projects that have been submitted by town officials to the state to possibly be funded by the stimulus package. Some of these include: $42 million to fund a solar farm, $24 million to create a system of rail trails, and $15 million to fund an arts center. I don’t know enough about the details of any of these projects to be able to fully evaluate their merits. But I do know that for a town of roughly 20,000, these sound like really big numbers—especially big numbers for projects that certainly seem optional. I suppose that is the point of the exercise, though, for town officials: submit pie-in-the-sky proposals and hope one or two get funded from the anticipated massive windfall from the government, er, that is, the American taxpayer, er, that is, the American taxpayers of the future.

As I’ve listened to all the banter amongst the various viewpoints of the stimulus package what frightens me the most is that I myself have become so accustomed to the massiveness of the $800 billion number that it seems irrelevant if it’s increased to $850 billion or lowered to $750 billion. And so I’m a little afraid that this is what’s happened to many of us, including our elected officials given the authority to make it a reality.

Behavioral economists (those economists who will acknowledge that humans actually may behave irrationally at times) have noted this strange (“irrational,” they call it) phenomenon amongst consumers that causes us to evaluate price & cost in terms of percentages, instead of absolute values. So for instance, if I go into the drugstore and see that one box of diapers is $30 and another box of diapers of similar quality is $20, I will certainly choose the one costing $20. Why? Well, of course, why wouldn’t I want to save $10? But if I walk into a ski shop (which is exactly what I did last night) and am evaluating which pair of skis my husband should buy, a $10 difference in price on a set of skis in the $400 range wouldn’t motivate me in the slightest towards which skis I should purchase. After all, we’re talking about a paltry $10, just 2.5% of the overall cost. In the box of diapers, $10 was a whopping 33% of the costlier diapers—a seemingly much more compelling savings! But economists would say, $10 is still $10, so why wouldn’t a rational consumer want to save $10, regardless of the overall price of something?

From my observation, borrowing money especially seems to lend itself to this phenomenon. When I was attending Harvard Business School, the majority of my classmates were funding their very expensive educations through student loans, most through Citibank’s student loan program called CitiAssist. What I noted was that because many people’s loans were already so huge, they would have no problem laying out $100 on a nice meal here, $300 on the big holiday formal there, and tens of thousands of dollars on big adventurous trips to Africa, Thailand, and Turkey. The term “CitiAssist” became virtually synonymous with cash. But the problem was, it wasn’t cash. And another $1000 in debt was still another $1000 in debt that would have to be paid back, with interest. But $1000 just didn’t seem like much compared to the $200,000 of debt with which many were graduating. (To be fair, when taking out these loans, many of these folks were anticipating exiting business school with very high-paying jobs, which they, in fact, did.)

This is why the $800 (or so!) billion stimulus package frightens me. It’s so easy for lawmakers to add a few hundred million dollars here or there, and we taxpayers hardly yawn—it all sounds about the same to us. But in fact, every billion dollars, every million dollars, every thousand dollars, is that much more debt to lay on ourselves, our children, and our grandchildren.

Whoops! I just read in the New York Times that the estimate of the stimulus package is up to $900 billion—just another $100 billion or so….

What are your thoughts on the size of the stimulus package and about what kinds of things are being included in it?

I didn’t even touch on the overall question of will this kind of stimulus actually work? Are you a Keynesian, and think it will work to help our economy recover, or do you align yourself with the Milton Friedman-style of economics, and think that we need to rely more on natural market forces to do the job?

Note: It may be awhile for my next post because I am expecting to give birth to my fourth child any day now (hence, the reference to the box of diapers!) Please continue to post comments on this post or on any ideas you may have. I will need to be “stimulated” too!

Comments

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Great post Margaret! I like that you pulled in your economics background on this one!

No doubt there will be some interesting opportunities to comment about the local hospital after you've had your next baby.

Posted by: Whitney Johnson | February 04, 2009 at 11:22 PM

Going into debt without ability to pay it off is not good for individuals, businesses or government. The bailout proposal looks very much like an easy way for President Obama and Democrats to push expensive programs through with relative ease. The majority of the money will not be well-spent. The jobs created by the current proposal are meager and permanent only if the tax-payer continues to pay for them.

BTW, I love your insight into the student debt phenomenon.

Posted by: Julia | February 08, 2009 at 07:49 AM

This blog compliments things I'm learning in a fascinating book - Deep Economy by Bill McKibben. It gives a good hard look at Behavioral Economy and comes up with some fascinating solutions for our economic woes through vitalizing local economies.

I love what you say, Margaret, about our tendency to look at percentages of savings rather than valuing money for its inherent worth. Fact is, I am guilty of thinking this way!

Posted by: Ginger Woolley | February 08, 2009 at 11:09 PM

The Obama stimulus package is way too big, and has far too many unnecessary things. The problem is the minority party, of which I am a member, really has no credibility at this point. Think about it -- which of the items below will make our grandchildren the angriest as they try to pay it off:

1. $2 trillion in Bush tax cuts (with no cuts in spending)

2. $1 trillion for Iraq war (and counting)

3. $700 billion for Bush bail out of the banks (September 2008)

4. $800 billion for Obama bailout package in February 2009.

Which of the 4 items harmed the economy the most? Which will help the economy the most? All four added considerably to the national debt, with benefits that are much harder to discern than a Harvard MBA!

Bottom Line: The minority party in Congress will always preach "fiscal discipline." But as soon as they become the majority party, they tend to forget about fiscal discipline as quickly as possible. Because the Republicans ran up such a huge deficit the previous 8 years, they have little or no credibility with voters -- especially in light of the inconvenient truth that Clinton actually reduced the national debt considerably.

Furthermore, I don't think any of the Republicans elected before 2008 have any hope of turning things around. If Republicans were wise, they would "clean house" and throw out almost all incumbents. Until they do, they will almost certainly remain the minority party.

Posted by: Joel | February 23, 2009 at 04:02 PM