U.S. Government Stimulus: Will it Work?
During the summer of 2008, signals of a faltering U.S. economy intensified. According to the U.S. Department of Labor (2009), unemployment rates increased. In addition, housing starts and auto sales decreased, stock prices plummeted and some of our financial institutions traveled to Washington, D.C. requesting federal financial assistance. Debate focused on the following questions: Should the government help these companies that arguably constitute the backbone of the U.S. economy? How will these companies use federal funding? Will investing taxpayer dollars in these companies be effective?
Economists’ and Financial Analysts' Perspective
Economists and financial analysts consistently stated they were unsure if an economic stimulus would work. I have the utmost respect and trust in those who have admitted uncertainty on this issue. I have no data to question their judgment. However, based on my research, experience, and observations, I can address why economic and financial analysts are unsure. Diagnosing the symptoms and prescribing a remedy for high unemployment, low stock prices, or fluctuations in the GNP is a science. Understanding what a corporate leader (or civic leader, or individual citizen for that matter) will do with federal financial assistance is not. No one can predict how a corporate leader will utilize financial stimulus dollars.
Economic Stimulus Package Objective
The stimulus objective is to rejuvenate the U.S. economy. First, stimulus dollars have been given to states, cities, and municipalities to improve public services (i.e. streets and sanitation, roads, bridges, etc.). Providing economic stimulus for this initiative has a high probability of success. No civic leader/politician wants the reputation of mis-managing federal funding to improve their communities.
Second, stimulus dollars have been given to U.S. citizens in the form of tax breaks or tax refunds. The expectation is recipients will spend their dollars to help boost the U.S. economy. Undoubtedly, there will be a mixed bag of behavior and attitudes. Some will save, some will pay off debts—specifically credit card debts, some will indeed go out and spend. Every individual will be different, thus, there is room for uncertainty. What we have found from the “Cash for Clunkers” initiative is American citizens will eagerly stimulate the economy—given a $4,500 incentive to do so (EIU Views Wire, 2009).
Third, stimulus dollars have been given to ailing multi-billion dollar companies. Despite good intentions, this stimulus initiative may not work! And here's why: The objective of a corporation is to make a profit and deliver a favorable ROI for its shareholders (Gardner, 2009). No corporation that requested and received stimulus money is going to use that money on any expense-related activity that adversely impacts their bottom line. Some way, somehow, this money will be reflected in the company's annual reports to enhance their profitability. No corporation will report to their shareholders they received an economic stimulus incentive, yet had an annual operating loss.
A Predictable 9-Month Review
Financial companies’ third quarter profits paint a picture of the results of financial stimulus assistance. Reuters (2009) reported net income for Morgan Stanley at $498 million, US Bancorp at $583 million and Wells Fargo at $2.6 billion. Simultaneous with successful earnings reports was news of corporate executive performance bonuses—again. These activities should not come as a surprise. But the amounts of some of the bonuses may cause alarm.
The concept of corporate executives receiving incentive bonuses is difficult to accept. Approximately 10 percent of American workers are unemployed (Wyss, 2009). There will not be a cost of living increase for senior citizens. As a result, one’s opinion of the success of U.S. financial stimulus depends on one’s perspective.
References
Gardner, R. (2009). Corporate Leadership Selection: Impact on American Business, Employees, and Society. Bloomington, IN: Authorhouse.
USA Economy: Quick View-Retail Sales Surge on "Cash-for-Clunkers." (September, 2009). EIU Views Wire. Retrieved October 21, 2009 from ProQuest Asian Business and Reference. (Document ID: 1860409671).
Wyss, J. (October, 2009). Spike in job losses is harsh reality of current economic "recovery". McClatchy-Tribune Business News. Retrieved October 18, 2009, from Business Dateline. (Document ID: 1870863611).
