So what’s up with the stimulus package and how come (every English teacher I ever had just rolled over in their grave) some people say it’s enough or too much or not enough? Why doesn’t anybody know, you ask? Who do we believe? (I’d say me, but I’m cynical and I’d be fibbing.)
Well, obviously you must be thinking that economics is a science, like chemistry, where you can do the math and figure things out. Economics is considered a social science (which puts it in the same part of science you’ll find political science. If there’s a lunatic fringe of science, that’d be it.). That means we’re guessing, and, although they’re educated guesses, a crystal ball is still involved heavily.
The problem is that it takes so long for things to percolate their way through the economy. The 3/4% drop in the interest rates the Fed made will take anywhere from six to none months to show real effect and the extent of that effect can be moderated or enhanced by other stuff that’s happening out there in the real world.
The other real issue is that perceptions and expectations are involved. You’ve seen how expectations of how this or that company ought to do can effect the stock price. If the market thinks Pear, Inc. ought to be making 6% profits and they announce 5.5%, Pear stock drops through the floor because that wasn’t meeting the expectations. Pear is still generating good profits, they just aren’t doing as well as other people expected them to do. Is that realistic, those kinds of expectations? No, but it does move the stock markets.
And that’s what the 3/4% drop in the interest rate was designed to do in several ways. First, that was the biggest change in that rate since the 1980s and, in the sea of expectations, big is huge, so to speak. (I couldn’t resist, sorry.) Second, the Fed, which was created in 1913 to try to mellow the economy away from huge rises and drops in the economy, has never, ever, ever done something to interest rates except after their regularly scheduled meetings. Doing something a week before a meeting was unheard of. That was supposed to make a huge hit with the stock market and prevent an expected 400 point drop in the market. Well, the stock market didn’t drop 400 points, but the rate cut had less effect than many economists and the stock market expected. So the new expectation is that 3/4 points wasn’t enough and the Fed will do more on Wednesday – to the tune of either a quarter- or a half-point more.
Aside: The Fed Chairman has, with that 3/4% rate cut, put himself directly into the expectation business. He in effect told the stock market that he will jigger rates to make them feel better. In my never humble opinion, that step may have been necessary, but it will cost him big time down the road in terms of making the Fed appear to be more malleable politically. For an independent banking structure, that’s trouble right here in River City.
Will that be enough? Well, what does your crystal ball say? Mine just looks sparkly. Remember expectations? Well, if you are a politician, right now you are thinking “Well, that may be enough and it may not. If it is enough, then I’m cool and the little people who vote for me are too. But if it’s not enough and nobody does anything now to make things better way off down the road, well, that’ll be primary time and everybody will blame me.” Nobody wants to take the fall for not doing enough to fix the economy.
Plus, if the government waits to do something until after it sees how this round of jiggering the economy goes, and it wasn’t enough, not doing enough now will make things even worse later. Since doing too much now will also make inflation go up, they’re between a rock and a hard place. But it’s much easier to say “We did more because we were worried about you little people” rather than “We didn’t do anything and you got screwed.”