Blog on the Run: Reloaded

Friday, July 31, 2009 9:39 pm

The economy and the stimulus package: good news/bad news

Filed under: Geek-related issues — Lex @ 9:39 pm

The economy shrank at about a 1% annual rate in the second quarter of 2009.

That’s not good, but it’s a darn sight better than the 6.4% annual rate that it shrank by in the first quarter.

Everything else being equal, Quarter 2 would have been just as bad as Quarter 1. The difference? Mainly, the stimulus package.

One other bit of good news: Disposable personal income, which rose only 1% in Quarter 1, rose by 3.2% in Quarter 2 as the tax cut associated with the stimulus package fully kicked in. Consumer spending still dropped, though, as people who are worried about the economy socked the extra money into savings rather than spending it.

It remains politically unpopular to say so, but until the economy starts growing on its own again and employment starts to pick up, the government needs to be spending more, not less. A few brave souls are starting to talk about a second stimulus package, perhaps as an extension of parts of the original package or perhaps a standalone package. Either way, depending on the details, it’s probably a good idea. It’s also clear that direct spending has a more immediate benefit to the economy than tax cuts. That wasn’t any big secret before, but Obama had campaigned on a tax cut for 95% of American earners, and some congresscritters insisted on putting additional tax cuts in the stimulus package even though anyone with a lick of sense knew that spending had to be emphasized to give the economy any real boost.

Still, although Congress is pondering rescinding Obama’s middle-class tax cut next year to try to start getting the deficit under control, it might need to wait one more year on that. Building our savings back up a bit would provide more private capital for investment — and there’s always the chance people miight actually go out and spend some of that money if they think the economy is picking up.

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