The economic stimulus explained to a five year old?
Topic: The economic stimulus explained to a five year old?
June 26, 2019 / By Corrina Question:
Here's a basic outline of how I view the stimulus -- if your ideas vary, write comments below. I'm trying to wrap my head around spending 1.3 trillion dollars when we're up against 14 trillion dollar GDP.
Assume you have a bucket full of water that represents the amount of economic activity in the market - (it's 14 trilion dollars)
As long as their are no holes in the bucket -- it remains at 14 trillion dollars...where businesses operate efficiently pulling profits and employing people.
Now assume we take a screwdriver and jam a hole in the bottom of the bucket and say that represents the housing crisis -- the escaping water is actually people losing money -- the credit markets freezing up (no loans/no credit cards/reduced credit lines/etc) - home equity lines of credit freezing up - spending stops -- businesses suffer -- people laid off -- more spending stops -- more businesses suffer -- more people laid off...it's a vicious cycle that won't stop for a while.
So now you have a bucket filled with water representing 14 trillion dollars worth of economic activity -- but as the clock ticks it drops to 13.9 trillion...13.6 trillion....13.2 trillion...okay?
The water is going to leak until consumer spending (demand) matches the products/service supplied (supply). Basic economics tells us when demand goes down -- and supply stays the same...the price must drop to a new equilibrium where output and supply must also recede (businesses scale back). The same thing applies here.
So -- we need to find some way to increase demand.
What the stimulus proposes is that we inject more money into the market to offset the amount of economic activity escaping.
Let the water hose represent the stimulus. If we turn the water on and pour it into the bucket (inject money via infrastructure investments) -- we can theoretically slow the rate at which the economic activity is decreasing. You'll have water leaking out of the bottom (loss of activity) and water being poured into the top (increased activity).
Essentially what it does is creates an artificial bottom or an equilibrium at a higher point than would be demanded by conventional usage of the law of supply, the law of demand and the point at which they cross, the equilibrium.
However -- if for some reason the hose stops pumping water (we run out of money in the stimulus w/in 4 years) before the leak on the bottom of the bucket is fixed (the economy hasn't experienced any growth and consumers haven't replaced the government spending with their own), then the free-market will take over and "drain" economic activity until we reach the true supply and demand equilibrium....say economic activity at 7 trillion instead of 14 trillion.
What the stimulus proposed to do is create a support somewhere between 7 and 14 trillion until consumers are willing and capable of spending again to support business and subsequent economic growth/strength.
The question is:
1. Is the stimulus big enough? (Can we keep the hose running long enough to plug the leak in the bottom of the bucket?)
2. If the hose does dry up, what do we do? Does the government ask for "stimulus II" and do taxpayers approve it? Or do we say "nope, didn't work -- let the free-market take over and we'll take our chances that we'll only be in the trough for a short period of time before we experience growth/expansion.
Remember the natural business cycles are:
Expansion - Peak - Contraction - Trough - Expansion - Peak - Cont....
We're in a contraction period sliding into a trough -- and the unknowns are how deep will we go (can it drop to 5 trillion...3 trillion...probably not)? And how long will wel be here (2 years, 5 years, 10 years)?
This is the problem I see. The stimulus only uses 300 billion dollars of direct investment in infrastructure. The annual economic activity is 14 TRILLION dollars. And the 300 billion is spread over 4 years. I don't think it'll make a noticeable impact. The trickle from the hose will be no match for the hole in the bottom of the bucket and I believe we'll see no slowing in the loss rate of economic activity. That is to say the trickle from the top (government spending) will be no match for the gaping hole at the bottom (free-market correction).
I think it's the foot in the door and the Administration will be back asking for more money soon. It's already rumored that the banks are going to get another "bailout" to the tune of 2.2 trillion dollars.
When will it stop? It's lunacy.
The government likes to talk about "kick starts" and instigating growth through these types of programs but it couldn't be further from the truth...the injection of money isn't big enough.
It doesn't matter how much money we inject, we're subject to the workings of the natural business cycle in the free-market. In other words, until we plug the hole in the bottom of the bucket, there's nothing we can do to maintain our 14 trillion dollar peak (absent of spending tr
Monkey -- the idea is to offer a support until consumers spend again, I agree. However, I question whether or not the support will create enough jobs to replace the ones that are leaving the market. If we can't maintain a sufficient amount of employment, then consumer spending will still suffer. I do believe you're correct when you talk about ending the War and bringing investor confidence back up again. The question still remains though -- how do we fix the hole in the bucket? Greenspan recently came out and admitted his approaches to manipulating the market (playing w/ interest rates) probably made things worse in the long run. That's my main concern...not the stimulus failing. Thanks for your answer -- it hit on some points I didn't think about.
mameelyn -- You're right -- GDP won't reach 14 trillion for decades. Great answer!
Baby Poots - Touche. I was actually attempting an explanation that a 5 year old would understand...it's still a little advance. A lot of people don't know what's going on as it's a complicated issue - so I thought I'd give a simplified explanation a try to get more peeps engaged. Thanks for keeping it light. ;) Your last couple sentences are great.
MommaJo - That's the 1.3 Trillion dollar question. We're shooting in the dark -- and met w/ a global economic "hiccup" like we've never seen before. It's not like this thing is only domestic. Maybe this will work?
https://www.mightyputty.com/flare/next?tag=ED|SM|GO| "$19.99, and if we order today, they'll throw the second tube in for free!" Thanks for the answer! ;)
Robinson -- Very informed answer -- I had no idea. I have to wonder if the expansion and/or stabilization of GDP over the past century is the result of artificial supports. The mantra has always been "spend, spend, spend." And as long as people do, we'll be fine. However, remove credit -- and we're left with people actually having to earn the money first (and without a job(?)) before they actually buy anything. I don't believe it's catastrophic -- but a lot of people who didn't plan ahead are going to get hurt here.
I'm also concerned how 300 billion direct injection into infrastructure spread over three or four years is going stabilize an economy where we're losing billions of economic activity per day. If adding water isn't coupled with patching the hole as Monkey suggested -- we'll doing nothing more than prolong this beast, if the relatively small injection makes any impact at all in my opinion. I always appreciate the extra info. -- thanks again! :)
Who is John Galt -- absolutely right. What we'll essentially do is turn off the hose years down the line and merely have a small/tiny trickle in the bottom of the bucket -- success? Well, then we'll be hit w/ paying for this beast and essentially jam another screwdriver in the bottom of the bucket (smaller hole) -- stifling growth again. That's the best case scenario. If we're subject to rapid inflation -- we'll have jammed two holes in the bottom...tax and a reduced purchasing power. It's tough to know what's best -- too many unknowns. Thanks for your answer
If you want to add anything else -- you can e-mail me or add it to the comments below the "best answer."
Best Answers: The economic stimulus explained to a five year old?
Bethanie | 10 days ago
For the purpose of your illustration, you said that the trickle of the hose cannot keep up with the hole.
But it can if we repair some of the hole, right?
Well, it appears Obama is planning to do so. He is leaving the Iraq War.
Bush wanted to fight the war, but not raise the funds (taxes) necessary to cover the war. To do it, he borrowed the money from other countries; and then had to borrow more and more when the war wouldn't finish.
He turned the $4 trillion National Debt he inherited into $11 trillion. Such a meteoric rise scared investors into no longer backing the dollar because they didn't believe we could pay back our debt. That sent the dollar's value down.
That means businesses have to pay more dollars to make the same products. Oil is also measured in dollars, so with the dollar losing its value it took more of them to equal the same barrel of oil. That sent oil's price way high, which raised costs of shipping way high as well. That combined with more expensive production costs to send prices through the roof.
To make up for that loss in money, the businesses had to cut expenses. The biggest one they cut was payroll; in other words, they laid off employees.
Well, employees are also consumers. When they lost their jobs at the same time that prices went skyhigh, they had to cut their spending. There's the problem with Middle Class spending.
Fewer sales meant a lower profit line for businesses, which meant more layoffs. There's your problem in the job market.
A lower profit line meant fewer investors. Would you invest in a company barely making a profit? How about one making an out-and-out loss? There's your problem in the Stock Market.
And employees are also bank lendees. Having lost their jobs and their savings (401k lost to stock market as well as investments), they started defaulting on their home loans, mortgages, and car loans. There's your problems in the financial sector, the subprime mortgages, the real estate market, and the auto industry.
If we leave the Iraq War, we stop incurring that expense. That reignites investors want to back the dollar and it recovers. That means the businesses can afford to make products again, and need someone to make those products. Jobs come back, and that means more customers.
More customers means a higher profit line because of sales, which means more investment into business from investors. The whole system is restarted.
You're right that we have to get to a place where demand and supply meet, and demand is too low. But if we keep the system afloat with the stimulus, while at the same time getting more money to the customers through jobs, they will meet at a higher point even if the trickle in is not as big as you think necessary.
Rather than put water in and try to save it, Obama only puts enough to keep the system alive. But he raises the customer's abilty to demand products. He's coming at it from the opposite angle you are, but reaching the same goal.
👍 108 | 👎 10
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Originally Answered: A few facts about the economic stimulus?
I have thoroughly explained to my husband our plans , when we receive it, for our stimulus check, will be as follows, and he completely agrees:
Get the check, cash the check,
Roam Yard Sales Friday Am. go to Tampa Bay Rays Spring Training Game in the afternoon.
Afterward hit the bars. Send husband off with a lady of the night, while I get a butterfly tattoo.
End evening back at the bars.
Sound like a plan?
you seem to have answered your own question in the question but the fact is that yes the stimulus won't fix the hole it will just try to keep adding water to the top of the bucket at the same rate as it is leaking out the bottom... It isn't even a patch job... the thing is that it's not so much that there's a whole in the bucket it's that the bucket is shrinking so the water is spilling out every which way. The 14 trillion bucket was to big and has to be brought back down to a manageable size. True people have to spend more so that the demand and supply are equal but the thing is that people need to reign in their excessive spending and start saving... right now people are trying to save as much as they can and spend as little as possible. so it's not so good right now but once people feel safe and secure with what they have saved they will start spending again its just that they need to find the balance between being frugal and being wasteful.
👍 30 | 👎 3
Not a bad analogy. And from 1929 to 1932, we did indeed have a 45% contraction in GDP. But since 1938, we have had only two years that the nominal GDP (not inflation adjusted) has contracted at all (1945-46, 1948-49), and both very slightly. Yes, real (inflation-adjusted) GDP has contracted by a small amount a few times since 1938, but the worst post-war contraction in real GDP (1981-82) was less than 2%, Even then, nominal GDP grew. Macroecomics is sophisticated enough now that we know how to keep that hole to only a few percent. Even if the contraction is an unprecedented post-depression amout of 5%, the stimulus makes up the difference. So the stimulus, along with all the actions of the Federal Reserve, will work fine. Predictions of financial armageddon are huge exaggerations.
👍 21 | 👎 -4
I believe your original question was how to expain this mess to a five year old, so we need to make this simple. First have him/her count out all the monies in the piggy bank - another leaning experience. Next, go to the hardware store. Depending on what he can afford, it seems like the choice is between buying something to patch up the bucket with, or getting a new bucket. Personally, I'd go for the new bucket. Luck.
👍 12 | 👎 -11
So if they take a million dollars in taxes from one guy and thousand dollars from another, then they both get a $500 stimulus check of their own money back? Where do I sign up, this is way easier then filling out a W2! American made tools are really good, I guess that doesnt say much for our cars tho....
👍 3 | 👎 -18
I think the big question here is how to efficiently fix the hole instead of trying to ignore it by adding more water. If your water got turned off or it's a slow trickle wouldnt you have to find a way to fix the hole quickly without waisting so much water? but how?
👍 -6 | 👎 -25
Ahh. But isn't taxation effectively another hole in the bucket.
And the hose will never stop. Out government can print funds indefinitely.
👍 -15 | 👎 -32
As a kindergarten teacher, I need to gather all the knowledge I have of five-year-olds, and all the teaching methods I have been exposed to; but, yes, I think I might be able to explain the "economic stimulus" to my kindergarten class assuming my kindergarten class had any concept of economics. Unfortunately, my five-year-olds don't even know who pays for their lunch!
👍 -24 | 👎 -39
Originally Answered: The Obama Economic Stimulus Package?
He will fail at this just like FDR did.
What they should do for the housing is this. Redo the loans for the amount the people paid for the houses at a lower interest rate and move it to a 40-50 year loan. We did not tell them to buy when it was high. And who knew this would happen. If they made money should they have to give that back. I think not.
They should be made to pay this back. Why should we eat this.
I am trying to sell, I lowered my price to where it should sell.