Frequently, clients and friends ask my opinion about the economic stimulus package. Is it really working? Does it make any economic sense? Aren’t we digging a deeper hole for our children, our grandchildren and ourselves?
These are understandable concerns, and they reflect the anxiety of the American people about the future of our country. To fully address these concerns, we have to take a brief look at history.
The Great Depression of the 1930s
When the stock market crashed on what is known as “Black Tuesday,” Oct. 29, 1929, it triggered an international depression where, in this country alone, unemployment reached a startling 25 percent. The depression quickly spread to most parts of the world and would take about a decade to be reversed. During that time, economists were feverishly trying to figure out how to best extricate the world from such economic devastation.
Banks were failing at an alarming rate, and panic inevitably followed. There were countless “runs” on banks in this country during 1932 and the early part of 1933, the year that Franklin D. Roosevelt was sworn in as president. What exacerbated the problem was that FDR refused to issue a joint statement with the outgoing president, Herbert Hoover, in order to calm the situation. FDR, so many history books say, didn’t want to be tainted with the failed presidency of Hoover and stubbornly refused to act to bring calm to the banking sector until he was installed as president.
FDR had an uncanny sense of the mood of the people and did, in fact, convince them that they should stop withdrawing their money from banks because, he told the people, most of the banks were in fact safe. He convinced them by having his administration rate the banks, allowing the weaker ones to fail. Additionally, his administration called for the passage of the Glass-Steagall Act in 1933. This act created the Federal Deposit Insurance Corporation (FDIC) on Jan. 1, 1934. The FDIC, for all intents and purposes, put an end to bank runs.
Digging Ourselves Out of the Great Depression
Though the banking situation was greatly calmed by 1934, the country was still mired in a terrible depression. FDR had initially thought that the best way to dig the country out of the depression was to raise taxes and balance our budget. Unfortunately, most economists agree that such an approach would just make a depression worse. What was needed was government spending to prime the economy, get people spending money again, increase production and increase employment.
During the 1930s, the government’s response to the financial crisis was characterized by trial and error. Finally, programs were put into place that would eventually employ thousands of Americans. However, it didn’t happen overnight. FDR was initially reluctant to have the government run large deficits, but he eventually instituted a wide varied of stimulus programs that enabled thousands of unemployed Americans to return to work.
The Philosophy of John Maynard Keynes (1883-1946)
John Maynard Keynes’ brand of economics calls for the government to intervene in times of economic crisis in order to restore order to the economy and bring production and employment to such levels that would create adequate growth and stability for the country. His theories were put into practice throughout the world in the 1930s. Most economists give him substantial credit for leading the world out of the Great Depression.
His philosophy is somewhat counterintuitive in that it calls for massive government spending in order to extricate both the government and the people from severe economic crises. Yet his insistence on fiscal and monetary intervention played a major role in aiding both the U.S. and the world to get out of the dreadful situation in which it found itself.
Most economists agree with Keynes and disagree with the so-called neo-classical school of economics, which states that free markets, unfettered by government regulation, will provide economic stability and full employment. Herbert Hoover, unfortunately, belonged to the neo-classical school and believed that the markets will regulate themselves and wide economic fluctuations and gyrations will thus be avoided if we leave the markets alone.
Why Isn’t the Stimulus Working More Quickly?
Certainly there are those who believe that, based upon all of the billions that the U.S. has spent to date in order to get us out of our economic dilemma, we should be much farther ahead than we are and should be seeing a far greater bang for our buck. However, economics is not an exact science. Fiscal and monetary policies require time to take effect. There is no instant fix.
There are certainly those who feel that the U.S. has already spent an inordinate amount of money to get us out of the economic mess that we’re in. Believe it or not, there are those who feel that we should be spending more money in order to ensure that we exit this recession more quickly.
Take Paul Krugman, for example. He is a Nobel Laureate who teaches economics at Princeton University, as well as the London School of Economics. He has been critical of President Obama for not being more bold and for not spending even more dollars in order to properly and more quickly stimulate the economy, thus getting us out of the recession as quickly as possible.
Economics Is Not an Exact Science
As a graduate student studying economics, I was dismayed about how inexact a science it was. There were no hard and true answers. There were theories that had to be tested in the real world to determine if they would yield the results prophesied in academia. This was my greatest complaint about economics. It was too fluid and always changing — a moving target. In fact, there’s an old joke about economics that goes something like this: If you lined up all the economists end-to-end, you still couldn’t reach a conclusion.
My feeling about the present economic situation that we find ourselves in is rather optimistic. I think that we are on the right track with the stimulus programs. Still, I wouldn’t venture to guess whether we need more or less stimulus money. I’ll leave that to the “experts.”
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at Ted@capitalsourcepartners.com.