Explaining Stimulus Packages

Economics Economics Questions
1

It is a slow day in the small Saskatchewan town of Pumphandle , and
streets are deserted. Times are tough, everybody is in debt, and
nearly everybody is living on credit.

A tourist visiting the area drives through town, stops at the motel,
and lays a $100 bill on the desk saying he wants to inspect the rooms
upstairs to pick one for the night.

As soon as he walks upstairs, the motel owner grabs the bill and runs
next door to pay his debt to the butcher

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill to his
supplier, the Co-op.

The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her “services” on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner. The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.

At that moment the traveler comes down the stairs, states that the
rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything. However, the whole town is now out of debt and looks to the future with a lot more optimism.

And that, folks, is how a Stimulus package works.

2

I’ve seen this one before, there is a thread about it somewhere on the forum.

That is not at all how a stimulus package works. Unlike the stranger, the taxpayer, who foots the bill for the stimulus, never gets his money back.

Also, in the town, everyone was both a creditor and a debtor [and to the same amount!] . That is not how it is in real life. People who owe money don’t have someone who owes them as well. All those people who lost their houses because they could not pay their mortgage did not have some hooker who owed them hundreds of thousands of dollars, like they owed the banks. And similaly for other people and institutions in debt.

The way a stimulus works is that money is taken from the taxpayers, impoverishing them, and given to pals of Obama to spend lavishly on luxuries.

3

I agree - I simply found it amusing! Although of course it opens the door to a more interesting question: If the Fedwas like the tourist in the joke and really would ‘soak up’ the reserves it pumped in, would that negate the inflation (and the theft that it entailed), putting things back how they were?

4

Mark, can you further explain what you mean by “soak up reserves it pumped in”

While first reading this, I had the initial thought of “wow that’s stupid.” But I couldn’t exactly figure out in my head why it was so stupid. Then I started to say to myself, “wait, what is so bad about this? They all end up even and with their debts paid off? Did that $100 really just make everyone’s situation better?” After reading Smiling Dave’s response and thinking about it some more, I think it now makes sense.

Everything in this story seems to work out so perfectly because the premise of the story is that everyone IS EVEN from the start!! In other words, the $100 is perfect to cover everyone’s debts (as Smiling Dave mentioned)!! In other words, the $100 would not have seemed to solve the problem so easily if the people were creditors and debtors for different amounts.

But because everyone is even, THERE IS ACTUALLY NO PROBLEM!!! The $100 seems to solve a problem that does not exist! The $100 is not needed at all!! If the hotel owner owes the butcher, who owes the pig farmer, who owes the Co-op, who owes the prostitute, who then owes the butcher, THEY ARE EVEN TO BEGIN WITH! If they could somehow know this, they could just have come together and said “we’re all even, no one owes anyone else anything.” And nothing would have to change hands.

Consider this: What if there were no theft? What if the hotel owner told the tourist exactly what he was going to do and said “Hey can I use this $100 to pay off the butcher? But don’t worry, I am owed $100 from a prostitute so I can pay you when I get that.” The tourist would say “Why would I risk my $100 with you so that you can only pay me back if you get paid back. I don’t gain anything from this scenario.” And this makes sense because there is a risk in life that people will not get paid back what they are owed or exactly the amount they are owed. But why would/should the tourist take this risk for nothing? Someone could argue that it is beneficial for the $100 to be inserted by a central bank so that everyone can settle debts with various people because no one knows how their debts are linked to other people…

But when you think about where this money would come from in real life (taxpayers), also think about the fact that everyone is not equally a creditor and debtor, and also think about the fact that no one knows for certain that someone will use that $100 to pay-off an appropriate debt right away, don’t you think it makes far more sense to forget about inserting $100 into the system at all? What else would solve this problem, you ask? This would: as soon as 1 person out of the 4 (only 1 is needed) earns $100 in their profession, that person could pay off their debt, and everyone else can pay off their respective debts in the same fashion as the initial example. Except the $100 starting point was earned, not stolen. Isn’t that far more logical?

5

JH2011:

Well done. Always gratifying to see someone thinking things through.

6

Great answer, and very well thought out.

What I meant by the Fed soaking up the excess money was analagous to the tourist picking up his $100 again at the end of the joke - i.e. the Fed injects money in to ‘stimulate’ then when said stimulous is over it collects it back up again.