Questions about the economic stimulus bill

The economy took center stage in the weeks leading up to the presidential election, and not much has changed since then. It's still a hot topic on Capitol Hill, where - in spite of President Obama's inclusive approach to discussing the details of his proposed stimulus plan - it's the subject of partisan bickering even as it has gone up for a vote.

In an effort to learn more about the basics of the economic situation we're facing, I found the CNN Money Summit - a series of plainly-put questions from people around the country, along with apolitical answers from economic experts. They don't all agree with one another, but their responses are far more enlightening any of the sound bites I've seen from Capitol Hill.

Here are some of the highlights, along with my thoughts on how the expert feedback has shaped my opinion on the bill.

Question 3: Give consumers debit cards instead of checks?

This question builds on the second question, which asked why the money from the bank bailout and stimulus package couldn't be divided equally among taxpayers as a means of stimulating the economy. The common response is that recipients would save the money, rather than spend it. Therefore, the idea of giving debit cards is intended to ensure that the money is spent.

Garett Jones, an economics professor at George Mason University, responds:

"But in this recession as in most, the biggest fall in spending isn't caused by consumers cutting back: It's caused by businesses cutting back. The big puzzle of recessions is why business spending collapses. Handing debit cards to consumers probably won't do much to get businesses buying more machines, more software and more buildings."

Not only does this make sense to me, it makes me a little irritated by the other "stimulus" checks we received under the previous administration. Don't misunderstand; I'm not complaining about receiving money from the government. But did I spend it on a new TV or a vacation or even diapers? No. It went to savings. So much for stimulating anything, especially since the market took such a dive.

Question 5: Where does the money come from?

This question is always a good one. We hear about billions and trillions of dollars, and yet we're happy to have a twenty in our back pocket.

Kim Rupert, fixed income analyst at Action Economics, responds:

"...the government sells Treasury bills - very short-term debt obligations - on the open market. When the government sells those securities, it scores cash for the reserves."

Treasury bills, or T-bills, are sold as another means of injecting capital into our government.

Rupert continues:

"If the market finds better ways to invest its money, the government won't be able to raise more funds for its efforts. Instead, it would have to increase taxes."

That is, if investors - either individuals or foreign countries - lose faith in the US government's ability to repay its debts, they may put their money elsewhere. In that case, tax revenue would be the fallback income stream.

However, my understanding from this series and from my research on T-Bills themselves is that the US government's credit rating is absolutely stellar, making T-Bills one of the safest investments available - the point being that if T-Bills become a risk (perceived or actual), our country will have much bigger problems on its hands than higher taxes.

Question 9: Why wasn't TARP enough?

This is an even better question. The answer will make you mad - as it should - but it will provide more insight into the depth of this mess.

Michele Boldrin, economics professor at Washington University, uses mortgage lending as an example of how the banks' losses were far greater than initially anticipated:

"There was a substantial amount lent out to build homes and remodel them: $11.7 trillion, to be exact. The banks put that on the balance sheet as profit for when it is paid back. But now people are not able to pay it back, so what looked like profit isn't. So in order to balance out that loss, you would have to put money in to cover it, but there isn't enough money being put in to cover the losses."

That projected profit spurred further investments, which generated more projected profit. All of those projections were based on assumed values of the investments, and those values plummeted when people began defaulting on their mortgages - a topic I've covered here previously.

What concerns me about the bank bailout is that I don't believe we've seen the bottom of the losses. We've still got mortgage rates adjusting upward - even as interest rates fall - and in this economic situation, with so many people unemployed and savings dwindling, more defaults seem inevitable.

The banks are going to need more money, and that's going to be a difficult sell to Americans.

Question 10: What if the stimulus fails?

Fair question, especially in light of the answers to Question 9.

Mark Gertler, economics professor at NYU, sheds some light on the history we don't want to repeat:

"The scenario policymakers are trying to avoid is Japan of the 1990s, where there was persistent stagnation for nearly a decade...But it's key that the political process not break down."

In other words, we really do need a bipartisan approach, in which concessions take place on both sides for the sake of swift action. From what I've heard in the Capitol Hill sound bites, both sides have dug in their heels to some extent.

Question 11: Robbing Peter to pay Paul?

That is, how do you pay off debt by going further into debt?

Mark Gertler responds again:

"Government debt is paid off by the Treasury taking in more money in the future. But that doesn't completely require that tax rates go up. If economic growth goes up, then revenue will go up.

But, in the end, it can mean that the taxes are just being pushed off to another generation."

As in the answer to Question 5, the idea is that T-Bills will finance the debt in the short term. Then, as the Federal Reserve helps manage the economic recovery, the long term growth will take care of the rest. While T-Bills are considered to be a safe and attractive investment, they are a short term solution where it comes to growing our money supply and getting it back in circulation, primarily as loans between banking institutions.

So while it's highly unlikely that investors will stop buying T-Bills, the threat of higher taxes down the line remains a reality if our economy stagnates at the macro level.

That's why it's not just a question of how to fund this stimulus bill, but how to ensure that the investments called for in its provisions actually spur growth - not just in government, but in the private sector as well. Government initiatives put people to work, but their paychecks are dependent on government revenue.

On the other hand, private sector growth is dependent on the money supply and on consumer demand. In other words, if the banks are lending and the people are buying, businesses will grow - and in turn, our country's economy will begin growing again.