Correcting Maddow on the Stimulus

I like Rachel Maddow. She is very bright and she often analyzes issues with significantly more composure than the other talking heads.

She commented recently on unemployment benefits and the stimulus.

Her comment: “Giving money to people who have no income so that they can spend it is the definition of stimulus.”

Analysis: Not really. The economic actors whom the stimulus is aimed to please (i.e. convince) are the people who decide whether or not they should put their money on the line and invest, whether it be working capital, pure investment, or maintaining higher inventories, and work forces. Unemployment benefits don’t really convince them to do anything to truly promote long-term growth and recovery. The economy is not a blind machine you pump money into and it reacts based purely on the amount of money being spent and floating around. The economic actors are largely aware of how money is being spent. There is no incentive to invest in long-term growth and expand inventory capabilities much less inventory and workforces if this marginal consumption provided by unemployment benefits is temporary, which it is. Investment is encouraged when the future streams of consumption money (i.e. what will be used to make the investment profitable) come from more permanent and reliable sources—primarily wage income. Unemployment benefits do not reduce unemployment and thus increase wage income—though economists disagree on the magnitude of the effect most agree that at least marginally, unemployment benefits tend to increase the duration of unemployment. Again, not a commentary on unemployment benefits, which I do find useful and will not rail against—just saying her comment was incorrect.