What's Wrong with the Populist Stimulus Plan

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The idea for "What's Wrong with the Populist Stimulus Plan" came from BusinessWeek readers "For the PEOPLE" and "Ann," as well as actor Russell Crowe and several amateur economists.

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Savers vs. Spenders

While saving money is typically a sound practice, it would deaden the populist stimulus plan's momentum by reducing its multiplier effect. In true trickle-down economics, the $10 one spends at a local barbecue restaurant provides employees with $3 and the owner $7 for the business. The owner passes the $7 along to the company's suppliers, where it is multiplied again as it pays the costs of running their businesses. Without the initial push, revenue streams run dry. (An influx of money could also stimulate crime: Robbery and other forms of theft might well increase if everyone suddenly got a large check.)

Excessive saving, which was part of Japan's difficulty during its "lost decade" of stagnation in the 1990s, is often an attribute of a public wary of the future, says Markus Brunnermeier, an economics professor at Princeton. (He is Smita Brunnermeier's husband.) When we're wary of the future and receive a gift of a large bundle of money, we're likely to think of going straight to the bank. Gay, who focuses in part on behavioral economics, says many of us would immediately recognize the interest-yielding potential of a lump sum. Thus there would be no multiplier effect, no re-injection of the cash into the economy on a large scale. "That is quite a huge amount of money, right?" asks Gay, hypothetically. "The way that [people] would treat it is that they would think about it as a straight increase in their wealth."

"There's only one thing money won't buy, and that is poverty," comedian Joe Lewis once said. But the poor, in the case of the populist stimulus plan, would actually provide the best chance for kick-starting the economy. Gay and Michl agree that the poor are more likely to spend quickly and with vigor. Many poor Americans also don't have a checking account; with no place to put a stimulus check, the money could actually stimulate. According to a 2008 policy paper by the Brookings Institution, 12 million households do not have checking accounts. That fact alone could mean a direct $120 billion injection into the economy, not counting multiplier effects.

Narrow Solution

Another problem? A pure-populist stimulus wouldn't address the deep structural weaknesses in the U.S. economy, such as heavy consumer debt loads, empty and foreclosed houses, rising unemployment, and icy credit markets. "These are serious, serious, interconnected problems," Waldman says. "Ten thousand dollars isn't buying anyone a house. It's a total, complete mess." Twice during President George W. Bush's term, Congress authorized checks. In 2001, the checks ranged from $300 to $600, and in 2008, most people received between $300 and $1,200. In both cases, the stimulus effect was quick but short-lived.

In addition to the weak multiplier of the populist stimulus plan, any huge sum transferred from Washington to the public would come with an even larger opportunity cost as other forms of stimuli were bypassed. President Obama's stimulus plan, which currently is expected to be around $825 billion, looks to be a more diversified approach, dividing relief between businesses and citizens.

Although many people will likely see a tax break from the stimulus legislation, don't expect any $10,000 checks from Uncle Sam.

Spielberg is an intern at BusinessWeek.