Stimulus-II versus TARP-II

As if we are conducting a lab experiment, we suddenly have the sequels to the two major government programs to deal with the financial crisis and mitigate the real economic fallout. We still, however, don't know the devil in the details, but, while we await more information, let me make a couple of points about general principles.

The first thing is that we should keep reminding ourselves of the difference between government "investments" as TARP-I featured and TARP-II will likely feature to some lesser extent, and traditional government fiscal policy. Whether using government funds to purchase illiquid (non-trading) securities, as TARP-I originally intended, or injecting "capital" by buying preferred stock in stressed institutions, as was implemented, there is a good chance that the Treasury will be able over time to recoup the cost of its investments. There will likely be some losses mixed in, but the odds on a net overall gain are good.

The stimulus packages, on the other hand, feature, not investments, but traditional government spending. Whether or not they are successful in stimulating the economy and mitigating declines in employment, the funds spent are lost to the Treasury (and only partially made up through higher tax revenues than might occur otherwise). Unfortunately, I know of no magic spending programs that are likely to be especially effective in achieving its goals and would be temporary and easily reversible as the need passes.

Indeed, it looks increasingly like the stimulus program will consist of a grab bag of traditional liberal spending programs that were rejected in calmer past circumstances. No matter what the composition of spending, advocates will be able to point to some benefits. The question is, however, whether the benefits would substantially exceed the benefits of not raising the pending budget deficit even further and adding even more to the outstanding government debt.

In addition to the important difference between government investment (hopefully temporary) and government spending of the traditional kind, is the difference in likely impact. TARP-II is designed to prevent a systemic collapse in the financial system that would be catastrophic for the economy. STIMULUS-II is more traditional government spending whose benefits may or may not exceed the long term cost. If Congress chooses wrong on the stimulus package, it will make some difference, but not a lot. The two programs are apples and oranges.

Comments (4)

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  1. Pamela Griggs says:

    I have e-mailed speaker Pelosi and my senator and congressman about the “stimulus” package asking and even begging them to stop this insane defecit spending. I don’t feel very hopeful that they will even take a second look at tax cutting alternatives to stimulate spending and job growth. I despair for our country in the liberals hands. How could people have voted for this? I’m sure this is why our public schools put out such an inferior product. I think our only hope is through prayer. Do you have any other suggestions for me?

  2. Jack B. McPherson says:

    Bob: That portion of the Obama Plan which he labels as "tax cuts" has nothing to do with stimulating the economy. He intends to confiscate money from productive taxpayers and re-distribute it, like candy, to non productive people who nevertheless make up a substantial segment of the electorate. His strategy is based on vote buying and raw politics. Once this initial money is distributed, it will dissipate quickly like a flash in a pan, and we'll be right back where we were when it started thereby prompting Obama to design and implement successive plans which will bear euphemistic labels but which will be calculated to solidify his political power. The whole endeavor is analogous to a Ponzi Scheme.

    That portion of the scheme that he labels as an infrastructure program is being slapped dashed and cobbled together in a precipitous manner that will be conducive for vast amounts of graft, bribery and poor quality control to permeate the system resulting in boondoggles of a dimension that defies the ability to define it in quantitative or qualitative terms.

  3. I am very happy that the stimulus package will help States maintain the health and education services that are now threatened by reduced tax revenues. Here in the crowded East we need more public transportation. The stimulus funds that provide for the improvement and operations of light rail and buses will also provide good jobs. I praying that the stimulus package is passed. I assume Pamela prospered under the Republican administration of the last 8 years, but it was a miserable time for me.

  4. It`s time we let the free market rules prevail!