This is indeed a tempting idea to get the consumers to spend again. Everyone likes money and getting more money is always a good idea to the consumers but let's look at this from a different perspective and see what comes out.
The first note I want to count is the idea that all spending cuts right now are not the consumers fault. While GDP is contracting and the consumer is cutting spending, it is not the only factor that effects GDP. Durable spending, Enterprise spending and many other types of spending are also being effected.
Enterprise spending will come back on its own and jobs will be replaced in the economy when the credit markets settle down a while and businesses get back to adding infrastructure and doing the things they need to to get what they do done. Indeed right now, inventories are high, or at least that would be the economic idea but they are dwindling, including in the housing market. Houses, non-new construction, have gone up the last several months at least 5% showing that they stock of existing homes is starting to get down there... granted that there is still a glut on the market but at a 5% loss in inventory right now, this should get down there soon and things will be back to a state of at least semi-normality.
Where is this economic stimulus coming from. The proposed $200 billion is not coming out of money that the government is going to print, more so, we are borrwoing from our future. The money that the government gives out has to be paid back at some point and currently that is going to be your future income, you are just getting it now.
The government has already borrowed significantly from out future, $700 billion tarp, $125 billion AIG, $200 billion Fannie and Freddie and the prior $125 billion stimulus, $125 billion Citi. That is significant spending as things are right now. It is believed by many economists, namely Dean Barkely, et al, that most of that money will be repaid and then some and since most of the TARP was put into companies in the form of preferred stock, we should get more of the money back and then some but at some point we have to address other issues like our $10 trillion national debt that is the favors of GW...the looming problems in social security and medicare/medicaid and the national health care issues...(not as big of a deal to me).
Further on this, why is it so bad for the economy to contract for a little while and for consumers to stop spending and pay off some debt. For the past several years, consumers have been spending $1.10 out of every dollar they earn. (a quick note, I am not savings is counted in the economy but I believe that this is in error and have long thought formula should be revisited). This by my calculations has been going on for the last, close to ten years.
Prices are starting to come down in the economy, and GRANTED, deflation can be very dangerous across the better part of the economy, but that is making out goods very prosperous overseas. Our exports have been gaining ground across the economy at an increased rate of like 2% for the last couple of years because first of all from the weakened dollar and now the decreasing cost of goods. This is improving our future, strong exports is a great thing for us economically.
The currently climate is going to only improve us immensely. The consumer will bounce back and spend again but maybe this is a good time for them to sit back and save and pay off some of the debt that accrued over the last decade of consumptive spending.
Further on this, the government itself is looking to increase its issues. It is now looking at adding a 100 year bond to the market in order to collect more money now. Dean Barkely did say something that is kind of dumb earier, in that we would still have relatively small debt to gdp ration in comparison to other countries...well fine that is a nice stat but does that mean that the other countries are in good economic condition. An anecdote, a man sitting in a hospital that just lost both his legs and is bleeding profusely and is about to die looks at the dead body next to him and says, "I am glad I am not him". Just because you are not in as bad of a situation as others does not mean you are in a good one. Right now the federal debt is at 60% gdp, if this were a consumer, that person would be considered in dire shape.
The effect on GDP of economic stimulus is not strong. In a recovering economy, it will have a stronger effect as the consumers long view is of strong earning potential in the future and will spend a larger portion of the economic stimulus, but in a weakening, or so viewed by the consumer, it will have less of an effect. The consumer view is always in alignment with labor cuts... therefore it is a lagging variable on the economy. The consumer will save or pay off debt with the majority of the money unless they see the economy as in good or improving condition therefore, by most estimates, it will only have about a quarter of one percent effect on gdp.
The biggest point is that this economy will recover! The consumer will go back to spending! Everything will be fine the markets just need time to correct. Yes, I know that I am an optimist on economics and the future growth of the country, but that is okay. The increased volatility we see in the market right now is due to the fact that bid/ask prices are coming back to normal and value is now starting to be seen in the stocks and value in the companies. Things are getting back to normal for this country, the recovery is starting and will continue into next year.