Saturday, February 07, 2009

Spending during Recession

What is one supposed to do in an economic downturn like the one we are experiencing now? With the people I speak to, I often seen the wide range of ideas from hiding the real money under the mattress to spend to boost the economy. The truth must be somewhere in the middle.

Today was a gloomy day around where I live. For the last few weeks, the weather was exceptionally warm and it was beginning to look like the winter was behind us, but that changed all of a sudden in typical california style. To get over the gloominess and to get my 4 year old S off my back, we set off to the near-by mall. I am not much of a shopper - my shopping normally revolves around thinking about buying something, rushing to the store, picking it up and never returning it even if it doesn't fit my needs well. So this time around, I had nothing to buy - S and I were just walking around.

With all the recession talk 24/7, I imagined a deserted parking lot, empty cashier lines and a far thinner crowd. But, was I wrong or what? The Macy's still had enough customers, Starbucks had a line that was spilling into the street, the counter bar in the restaurant was still milling with people. This may completely be a coincidence after all, but really the people are not reducing their spending yet? So, I looked around to see what the official statistics on consumer spending was - the consumer spending rose only 3.6% in all of 2008, the worst since 1961. Clearly, the spending habits have changed and I hope what I saw wasn't people spending away their severance payments! Sometimes when the disaster strikes, people's tendency is to pretend like nothing ever happened. Given nobody knows how long this one is going to last, that may not be a sound strategy at all.

Where does $800 billion go?

NYTimes has described the republicans as the milling crowd in front of a building on fire who won't let fire fighters in to fight the fire - this is exactly how I feel about the republicans - the bickering and the nit-picking of these supposedly 'patriotic' folks put the politicians in India look much more sophisticated. But, really, the calm and cool Obama himself has lashed out against these folks on a series of interviews last week.

This stimulus is much needed and most economists are wondering whether this is big enough - would a bunch of construction projects alone save this economy from collapsing? Japan who has been in recession since the 90s spent trillions of dollars in construction projects, every road, and every bridge that was ever dreamed of was built - but it still did not yield the results they expected. Why? Looking back, the economists are saying that the spending focussed too much on construction. There is a lesson to be learnt there. If you take a careful look at the 800 Billion dollar bill, while the republican nut jobs continue the theatrical protests, I am afraid that the part of the spending that republicans are bitching about is exactly what I think is too small. Frankly I don't care about the tax cuts - it hasn't worked in the past, it will not work in the future either - an example of a republican ideal that has been carried over for years with no single example to show for its validity.

Here is the 'wasteful' spending. Judge for yourself - where do you not want to spend?

  • Educational Investments ($141.6 billion):
  • Tax cuts (275 billion)
  • Health care investments ($112.1 billion):
  • Welfare/unemployment ($102 billion):
  • Infrastructure investments ($90 billion):
  • Energy investments ($58 billion):
  • Telecommunications investments
    • $650 million for Digital TV-to-analog converter box coupons and Digital TV education.
    • $350 million for a broadband data collection effort to allow states to track--and specifically, map--the availability of broadband access
    • $2.85 billion to implement a wireless and broadband deployment grants program, with $1 billion of that set going to wireless.