Why the Stimulus Plan Won't Work

by: Keith Robison

It’s unfortunate, but the stimulus plan itself is not going to be enough to revive our broken economy this year. While the price tag may be staggering, even jaw-dropping, the funds to consumers will merely fill holes and the funds to businesses will not create enough new jobs in the near term.

$145 billion could be funneled back to employed consumers through several payroll cycles. But as we saw with last year’s rebate checks, consumers did not spend the money as planned. Consumers that were sent rebate checks merely used them to fill holes, and this was at a time when the economy was in much better shape. In fact, the rebates that were sent out last year were only 12% effective. An additional $191 billion will be used for unemployment benefits, earned income credit expansion, COBRA, AMT tax relief and feeding the hungry.

$144 billion is to be spent on infrastructure in areas such as transportation, roads, healthcare and education. Infrastructure and healthcare companies, such as Caterpillar (NYSE:CAT), Eagle Materials (NYSE:EXP), Fluor (NYSE:FLR), URS Corp. (NYSE:URS), Stantec (NYSE:STN), Jacobs Engineering (NYSE:JEC), Cerner (NASDAQ:CERN), McKesson (NYSE:MCK), Eclipsys (ECLP) will benefit from this part of the bill. However, the problem with using infrastructure to stimulate a quickly deteriorating economy is that there is a significant lag time between the announced spending and the job creation due to the amount of planning that is required for such large projects. In the meantime, our economy is suffering from a massive feedback loop, which is causing deflation throughout all sectors.

$91 billion will be used as a “slush fund” to bail out states, which have mismanaged their budgets. The majority of that $91 billion will be used to help states pay for Medicaid and unemployment benefits.

The stimulus bill does have plenty of spending which will not stimulate the economy. Here are a few parts of the bill that were singled out by Senator Tom Coburn and former Maryland Governor Bob Ehrlich:

  • $2 billion to build a coal plant that produces zero emissions (note: the technology for this project does not currently exist)
  • $88 million to study whether or not the Coast Guard needs another icebreaker
  • $600 million for hybrid vehicles for federal employees
  • $400 million to prevent STD’s
  • $1 billion for the 2010 census (twice the amount the same study cost 10 years ago)
  • $200 million for community college computers (normally state funded)
  • $448 million for a new homeland security building (note: the government already has $1.3 trillion worth of empty buildings)
  • $248 million for the new furniture that is to go in the homeland security building
  • $75 million for smoking cessation
  • $6 billion to turn government buildings into green buildings
  • $88 million to renovate the public health building
  • $200 million to lease alternative energy vehicles to the military
  • $75 million for a security facility (note: four in use already, another is not necessary)
  • $25 million ATV recreation trails
  • $650 million digital TV transition coupons
  • $400 global warming research
  • $150 for the Smithsonian

Just a reminder, this bill is supposed to stimulate the economy and create new jobs, not waste money, fill holes, or cover costs that are the state’s responsibilities. The Wall Street Journal recently conducted an analysis which estimated that approximately 12 cents of every dollar in the stimulus bill is for something that can plausibly be considered a growth stimulus. According to senator Tom Coburn only two stimulus plans passed by congress have ever worked and unfortunately I do not think this plan will make it as number three.

Personally, I think a large portion of the stimulus should be spent on venture capital, funding start-ups and companies that are looking to expand operations. Companies that would benefit from the plan would most likely spend the capital injections on new assets and additional staff. While the U.S. would hold an equity stake in each of the companies as well as reap the tax benefits from the growth. Logistically it may be difficult, but it is a more constructive idea with potentially higher returns than sending a bunch of checks to nearly broke consumers and funding earmarks along with other random projects, many of which are unnecessary.

Disclosure: no positions