Why The Government Passes Stimulus Packages – And What You Can Learn As A Result

Let me start by saying I am not an economist. Also, let me point out that I am not trying to get into a political debate. I am going to make the argument that many of our elected officials (on both sides of the aisle) make financial policy just like we do. That’s why the country is in a mess. We can learn a lot from observing their actions — but you might be surprised by what we learn.

I read an article in the Investor’s Business Daily a few days ago. In that article, the author tried to build a damning case against the government’s stimulus package. While some politicians argued that the stimulus was required in order to stave off a depression, the paper tries to dispel that argument. Here is the crux of his argument:

There wasn’t going to be a depression.

The paper states that economists in the White House predicted (in January 2009) unemployment would top out at 8.8% with no stimulus. This was below the 10% levels during the recession of 1982 and well below the Great Depression’s unemployment levels. The Congressional Budget Office predicted that the recession would end in the second half of 2009 without a stimulus as well. They were right. The recession officially ended in June of 2009.

The economy hit its low in December of 2008 and started recovering shortly thereafter. This was long before the first dollar of stimulus was ever spent. And by the time the recession was officially declared over (June 2009), only 15% of the stimulus money was spent.

So why did the government pass the stimulus package and what can you learn from it?

There are economists on both sides of the political fence that argued for and against the stimulus, so it’s really not a political issue – even though many people present it as such.

The stimulus was passed, in my opinion at least, partly because people were scared out of their minds and wanted action. “Do something…anything…to make it better.” That was the underlying sentiment at the time.

Even though it felt like the world was coming to a financial end, it didn’t. Huge financial institutions, banks, brokerages, insurance companies, automobile manufacturers were closing their doors. The mortgage and housing industry was imploding. That’s scary. Even though the numbers may have indicated things weren’t as bad as they seemed, it was impossible to just sit there and do nothing.

Let me say it again. I don’t know if the stimulus was a good or bad idea. I have my feelings about it but that doesn’t matter.

What matters is that we learn. And I think there is plenty to learn from this point in time.

Let’s focus again on the act of the stimulus – not all the financial and legal mistakes that were made over the last 35 years that got us into the mess.

I believe it was impossible (emotionally) for our legislators to sit there and do nothing even though that may have been the way to go. The pressure to take action, any action, was simply too great to ignore.

Even though these guys had the numbers and there was at least some data available to suggest that we didn’t need to do anything – they passed the stimulus. The data was ignored in favor of taking action. I’m sure there was other data that suggested they needed to pass the stimulus, but how could the data that I referenced above be completely ignored? It was because of the collective fear.

I believe that same sentiment directs many of us (at times) when we make financial decisions. We are the “now” generation if ever there was one. We need instant results in our finances. Many times we’re willing to listen to the next person on the radio (or on the internet writing a blog) who makes tantalizing promises.

When you prepare an investment plan for you and your family, it’s a plan for the long term. Often I see people change course at the first sign of trouble. They just can’t tolerate the discomfort of losing money. I understand how upsetting it is. But unfortunately, if you have long-term investment goals, you will have to make long-term investments to achieve those goals. And even more unfortunately, long-term investments are by nature volatile over the short term.

I am not a fan of “buy-and-hold”, as you know. And that’s not what I’m talking about. What I’m saying is that no matter how you approach investing, there will be times when you won’t make money or you won’t make as much money as your friends do, and that’s going to bother you.

Your choice at that point in time is to remember your long-term goals and stick with your plan or jump ship and continually look for the magic formula.

Unfortunately, you and I aren’t the government. When we make financial decisions, we pay for them ourselves. We can’t tax anybody and we can’t print up as much money as we like.

The government’s stimulus package may have been exactly the right thing to do. Or it may have been the most colossal waste of money we’ve ever seen. That’s not the point. The point is that this pivotal financial decision was made under duress and at the heat of a very bad and tense point in time.

Do you let super tense and stressful situations impact your financial decisions? If not, how do you keep that from happening?