A Pamphlet from Don Stuart, Preserve Our Nation, LLC
Pamphlet #24 - 8/4/2009

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Can the Government provide Stimulus?

I present the question: " Can the Government actually Stimulate the Economy?"

But first, Breaking News..... Timothy Geithner, Treasury Secretary, has finally stated the truth: "Recovery is based on Private Spending and Investment."  He admits that the government can't do it. I've been saying this for months.  Continue to read to find out why.

Let's talk about the economic MULTIPLIER effect.  What this means is that for every dollar spent or not spent creates a change in the GDP.  So a multiplier of 1.29 means that spending $1 yields a increase in GDP of $1.29.  In reverse, not spending $1 (Change in Saving rate) yields a decrease in the GDP of $1.29.

The economic multiplier is created when you spend a dollar, a small part of that dollar is spent again by someone who received it as part of their income.  This effect is repeated until the amount spent is to small to count.   As an example, a 6.8% transfer rate from one person to another with a expansion of eight (8 people spending original part of first dollar spent) yields a Multiplier of 1.69.

The Obama administration is claiming that the stimulus has a economic multiplier of 1.69.  So the $80 billion of the stimulus spent so far has yielded an increase of $135 billion dollars in the GDP.

During the first six months of 2009, our savings rate escalated to 6.9%.  A 6.9% savings rate is equivalent to $700 billion taken out of the economy.   Assuming the same multiplier effect of 1.69, consumers have taken out of the economy $1,183 billion ($1.2 Trillion).   The latest economic figures show that the economy has contracted 7.9% in the first six months of this year.  On a 14 Trillion economy, that's a contraction of $1,106 billion.  Looks like our saving rate contraction is right on with the contraction of the economy!

So why does anybody think we can have a recovery?  Obama and Congress put in $135 billion (multiplier effect) and consumers take out $1,183 billion (multiplier effect) and the government thinks this is how to stimulate the economy.   Until the government exceeds the amount taken out, the recovery will not make any progress.

There are two options for the Obama Administration:

  • Increase immediately (this year) government spending to $787 Billion ($1.3 Trillion with multiplier).  Another Stimulus package would be required and/or move the current stimulus program spending up so all the money is spent this year.
  • Use his Presidential Bully Pulpit to convince the consuming public that they need to start spending money now.

The public will not allow the government to have another stimulus package, so Obama must convince Congress to move up the spending in the current bill.

Obama will never promote the idea that the public must start spending.  The public quit spending because the Liberals downplayed the economy and scared everybody over the past three years.  They criticized President Bush after 9/11 for encouraging everyone to continue with their lives and go out an spend money.  President Bush averted a recession. Obama must admit that Bush was correct and appeal to Americans to return to spending.

Our economy has gone "COLD TURKEY" from a free-wheeling spending economy to a saving economy.  The jump was too big for the economy to absorb in such a short period.  We need to retreat and start saving at a slower pace until the economy recovers and then increase our saving rates.

Our economy has pent-up demands that need to be released.  Only Obama can release the spout and get this economy running again.

But will he?

What can you do? We all need to spend a little more if you can afford it. Go out to eat more often. Tip the waitperson an extra dollar. It's the little things that add up. Everyone needs to do their small part.

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