“Do you want to fix things or just feel better?”
This question was recently put to me by a doctor. But I was thinking about the same issue when it comes to the economy. It’s frequently asserted that if we extend unemployment insurance, the people on unemployment are likely to spend the money rather than save it because they need the funds for basic necessities. The idea is that if you spend ¾ of any money you get, and the next person spends ¾, and so on, $1 billion of stimulus can become $4 billion of economic activity.
The idea of using stimulus to jump-start the economy has been with us a while. But it didn’t work this time. The problem is that people tend to save a one-time windfall, while they do spend permanent changes in their income. So when Microsoft paid $3 / share it didn’t stimulate the economy, and when Katrina destroyed $80 billion it didn’t trash us. Temporary factors make temporary changes.
I’m not saying that the stimulus wasn’t needed: pain-killers are necessary sometimes when you’re sick. But you if you’re seriously ill you can’t just take Tylenol—you need to think about what’s causing the illness. And it seems to me that what’s making our economy run slowly is a lack of incentive to innovate. We’ve got all kinds of new, neat-o gadgets and unprecedented connectivity. There are lots of entrepreneurial ideas. But if the structure of taxes is going to change and future marginal rates could go up to 75%, why knock yourself out?
Palliative care may be justified on humanitarian grounds—like extended unemployment benefits. But the only time it’s the main part of a medical program is when the patient is terminal. Hopefully our economy hasn’t come to that.
Douglas R. Tengdin, CFA
Chief Investment Officer
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