Is Stimulus Package Enough to Combat Economic Crisis?

Soon-to-be-announced from White House is an American Recovery and Reinvestment Plan for which President-elect Barack Obama is now vigorously working on. He is all preparing to announce this heavy package with a hope to provide relief for American people who have suffered a lot from the present crisis. The recent program amounts almost $800 billion, not yet price-tagged though, which is a sequel of already expended $7.2 trillion in the last year to combat the mess. Despite the concern from some quarters of society about the negative consequences that this program can create through imminent fiscal deficit, most people believe that the positive outcome would dominate the negative side.

Now a question arises whether this package would be enough to overcome the problem.

With the announcement of each stimulus package, government not only injects money into the economy to boost the economic transactions, but also creates silver lines on all negativity, which make economic agents believe that the government efforts will certainly bring good days in the future. Of these two goals of the government, in my opinion, the latter is more powerful than the former. I do believe that public sentiment is a crucial factor to create business cycles. After crisis breaks, the productive potential of the economy does not erode overnight. Businesses are up there with their full capacity to run their business when situation reverts. Consumers, on the other side, halt their current consumption switching themselves to accumulate precautionary saving. Everything needed to boost economy is in place instead. One can compare this situation with conservation theory of energy which states that total amount of energy in an isolated system remains constant. Analogously, the potential of the economy is constant at any time no matter it is in recession or in boom. The only difference is that the so-called economic energy changes its form. The kinetic energy of the economy, which is demonstrated as vibrant economic transactions during normal economic times, is converted to potential energy as accumulating during crisis period. In this situation, economic agents remain dormant, but it is the government that can play a significant role to electrify the potential energy and convert it to kinetic energy. This can be done through changing economic incentives of the people by using several effective means.


The origin of economic stimulus package dates back to the economic doctrine of a great economist John M. Keynes. His idea actually turned out to be a boon to fight Great Depression during 1930s. Keynes’ idea of active fiscal policy has been proved to be a very successful method, and history is filled with many successful stories about such policy. Monetary policy, on the other hand, assumed extensive popularity after 1960s to have crucial role to affect real side of the economy. The surprise monetary policy generates real effects in the economy in the short-run, according to monetarists.

These approaches are not, however, immune to shortcomings. The major concern about government stimulus program is its questionable multiplier effect on real GDP. If government expenditure multiplier is closer to unity or less, there is no point of making such expenditure with a belief that such expenses generate positive effects in the economy. Working through monetary policy too is not that satisfactory as the link between monetary policy instruments and macroeconomic variables are not that direct and robust. It is verified by the current reality that the economy did not show much response despite Federal Reserve reduced interest rates closer to zero. Therefore, it seems that only the actions from fiscal and monetary side are not enough to prevail over the current situation. Policymakers also need to search for complementary ways that have direct impact on public sentiment so that people would actively participate in economic activities and the economy would take the upward trend.