Feb 092009
Authors: Ian Bezek

It appears likely that an economic stimulus package will soon be enacted. While its aim is good, the methods are flawed.

A stimulus can work if the economy is experiencing a temporary hiccup, but we face a severe problem that stimulus can’t fix.

To understand the effects of a stimulus plan, we must first look at how we got into this mess. During the tech wreck of 2001, the government became worried as the economy headed into recession. The Bush administration overreacted, passing an expensive package of tax cuts, while Federal Reserve Chairman Alan Greenspan slashed interest rates.

The result of this was an all-out rush to buy houses. With interest rates near all-time lows, just about everyone with a pulse could get an affordable mortgage. The result? A gigantic unsustainable rise in home prices.

As common sense would predict, the housing bubble ended badly: Joe the plumber could never afford that half-a-million dollar mansion he bought with no down payment. Homeowners quit paying their loans, foreclosures began en masse and so began the economic downturn presently afflicting us.

The core problem of the economy is debt — people have lots of debt, on credit cards, automobiles, houses, and so on — and there isn’t enough income to pay it all off. There is literally more debt in the economy than there is money (dollars) available to repay it.

This situation can’t end well: When more debt exists in an economy than there are means of repayment, somebody is going to be left holding the bag.

This escalating debt mountain has been building for the past couple of decades as America has fallen into rampant consumerism.

Up until recently, people have been able to borrow more from corporations or the government to pay the interest on their debt. Now, corporations – as witnessed by the collapse of much of the banking sector – have been swallowed up by the debt too. If a bank lends to deadbeat Americans long enough, it drowns too.

Only one pillar of our debt-based economy remains: the government.

Foreigners love to lend to it because the American government historically has paid its debts. However, the American government is on the precipice of falling into the same trap that has destroyed the American consumer and corporation: too much debt that can’t be repaid.

At some point – and it isn’t far away – the government will lose its ability to borrow more as foreigners grow scared of lending us more money. Should the government try to take on the debt service of the entire American economy, it, like our tapped out consumers and companies, will also collapse.

Thus, this stimulus takes us down a perilous path.

The core problem of our economy is debt: There is too much debt and not enough income. Borrowing more money to stimulate the economy only enlarges the debt cancer.

The economy needs to work through the debt. People who can’t pay their bills should declare bankruptcy; banks that are insolvent should be shutdown. By allowing bankruptcy, we cleanse the system of debt and give the economy a fresh start.

Should the government fight this recession, we may put off the day of reckoning for a couple of years, but the debt cancer would still be growing leading to an even worse crisis in the near future.

The government needs to abandon its efforts to singlehandedly stop the business cycle. Economies go up and economies go down; we’re overdue for a down period.

We’ve avoided recessions in 1990, 1997 and 2001 through massive government debt-funded spending. This has left the government destitute. Fighting recessions, like fighting the tide, is a fool’s game.

If the government insists upon fighting every recession with more debt-fueled spending, we will go bankrupt. Financial physics always win.

Ian Bezek is a junior economics major. His column appears Tuesdays in the Collegian. Letters and feedback can be sent to letters@collegian.com.

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