Stimulation is the name of the game, and the US hasn’t let us down, pledging to spend US$787 billion. It builds a lot of schools and hospitals, but it doesn’t bring a sudden end to the global recession.
Post Valentine's Day, the world is stimulating. Leading the way is the US, with a whopping US$787 billion spending package having been approved.
It's a staggeringly vast amount of money. Around a third will go towards tax cuts, with another third going towards aid, in the form of aid to the states, unemployment benefits and access to healthcare. After that, the money is spread between education, infrastructure, alternative energy, food, farming, and many more industries.
The debates have already begun as to whether a) the amount is right, b) the strategy is right, c) the allocation is right and mostly importantly d) it will revive the economy, or is a case of simply throwing good money after bad.
Something Is Better Than Nothing
I have consistently been of the view that doing something is better than doing nothing. I have no idea if the US stimulus package will end up being a good use of all that money. The same goes for the UK and all the other countries around the world that are following the great stimulatory path.
But doing nothing is not an option. Unemployment would likely rise to something like 12-15%, banks like Royal Bank Of Scotland (LSE: RBS) and building societies would have gone bust, house prices would have fallen by over 50%, and pension funds would have been obliterated, amongst other things. The social cost alone is not worth thinking about, let alone the social unrest.
Let Them Fail
That said, I do get rather tired of industries holding out their begging bowls, praying for government bail-outs to keep them in business. The car industry is the most obvious case in mind. Why should we keep highly indebted, loss making and often inefficient entities in business?
The main argument is because of the need to protect jobs. Well, hello? There are plenty more industries cutting jobs, and their workers and their bosses are not crying-out for government assistance, or not for the moment anyway.
BT Group (LSE: BT-A) operates in a highly competitive industry, sports a large level of debt, has a huge pension deficit, and is cutting staff. Should the government, and therefore taxpayers, bail them out? Who’d be next? ITV (LSE: ITV)? Daily Mail & General Trust (LSE: DMGT)? I don't think so.
More companies need to either fail or merge. There will be consequences. For example, if a major car components supplier failed, consumers may not be able to get replacement parts for their old and banged up Rover cars. Will that result in thousands of Rovers hitting the scrap yards? Only if no other company can turn a profit supplying parts for the thousands of Rover cars travelling on the country’s motorways.
Welcome To The Harsh Reality Of Recession
It's all part of the cleansing process. That is the harsh reality of recession. The strong survive, and in better times, get even stronger. The weak perish, replaced by more efficient, nimble operators. The cleansing process may also involve Rover-owners having to replace their vehicles sooner than they'd otherwise have chosen. Another option is to go car-free, or downsize to being a one car family. It is possible.
In all of this, it is not the end of the world. In many respects, the hardest part is the realisation that this economic disaster means we just can't have or buy everything we want. It's the realisation that we need loo paper but we don’t need a flat screen TV. It's the realisation that we will probably have to retire later then we were planning just a year ago. It's the realisation that we have to live in a modest dwelling, rather than a grand £500,000 plus house.
Governments around the world need to do something. They need to attempt to stabilise the economy. I don’t know about you, but when I get a few extra pounds in my pocket from the government ‘for free’, I’m quite happy about it.
I might even go out a spend some of it on a nice-to-have, like a replacement digital camera at a DSG International (LSE: DSGI) store, or a replacement pair of shoes at Marks & Spencer (LSE: MKS) or Debenhams (LSE: DEB). Of course, that's the whole idea of stimulus packages – to encourage spending.
The Better Of Two Evils
But government's ‘doing something’ is not going to solve all our economic woes. One-offs like ‘free money’ give a short-term boost to the economy, then poof they are gone. It's why governments are hell bent on concentrating their spending on temporary measures which will hopefully have long-term benefits, like education and health-care, rather than permanent measures, like a permanent reduction in personal tax rates.
The outcome of all this stimulating is that the economy won't be as bad as it would have been if nothing had been done. But bad it will still be. It also means it will take many, many years before the economy returns to anything like the go-go days of the early 2000s.
Doing nothing might have meant a shorter, but infinitely sharper recession. Doing something means we'll likely have a longer, shallower recession. It’s the lesser of two evils.
More: The End Of The World Has Been Delayed | Bad News Could Make You Rich | Shock: Even Obama Can’t Walk On Water
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> Bruce Jackson does not have a beneficial interest in any of the companies mentioned in this article.
