Stimulus Question

A former student writes "The government issued the economic stimulus package a number of months back. I am wondering your opinion as to whether stimulus packages like this actually work and have a positive effect?"

Checks sent to individuals (like what we saw earlier this year) don't help the economy that much. The reason is that individuals tend to save the money, not spend it.

Spending money on bridges and roads helps more.

Bang for your Stimulus Buck

(See also the "commentary" links at the bottom of this page.)

My view is that we can shorten the recession by spending money on roads and bridges. The problem now is that (1) people are losing jobs, (2) this causes them to spend less, which (3) causes more people to lose jobs. It's a downward spiral that feeds on itself.

If we give money to everyone, then a lot of that money goes to people who haven't lost jobs. They won't spend it, so that money won't help break this cycle. Public works will help more, because that money will go to create construction jobs. The money will go to people who would otherwise be unemployed. These people will keep spending instead of stopping, and this will help break the cycle.