Someone, thankfully, in one of my classes fessed up to not knowing what the stimulus bill was about and how government could stimulate the economy. I'm sure he or she was not the only one unsure about this (this is why we tell you that there are no dumb questions, we need to know the level of knowledge you have in order to effectively communicate ideas to you).
With that in mind here is a brief overview of what the issue is about. Bear in mind that I am not an economist, but even economists disagree about all of this.
During the Great Depression, policymakers struggled with what to do. How does a government get itself out of a depression? Should the economy be left alone -- to the peril of the general population -- or should it intervene, and if so how?
Prior to the Great Depression laissez-faire ruled. Little if anything, was done to address a slumping economy, but with the 1932 election -- which followed the onset of the depression -- ideas (particularly those developed by John Maynard Keynes) emerged that held that a focus on stimulating demand would help the economy rebound. This meant government spending more than it took in, but focusing spending projects that would put money in people's pockets. Generally these are public works projects, but they could be all sorts of things. This was, in a sense, what the New Deal was all about.
The idea was that when government funds a project -- no matter how trivial -- the people involved in that project would not only earn money, but would spend that money in the local economy. Government may pay me to dig a ditch, and I use that money to pay my mortgage, buy groceries and clothes, and maybe see a movie. So the money I earned helps out the bank, the grocer, the shop I bought my clothes and the owner of the movie theater. They can then stay in business -- spend their money as they choose -- and continue to hire or retain workers who can then spend their money in the local economy.
So when government spends money to stimulate the economy, it intends to inject money in the economy that will circulate in the community. The theory is that this stimulus will help the economy, and the general population, survive until the economic system picks itself up and can begin to create its own jobs.
There are arguments against this theory, and nuances that are worth further discussion, including suggestions that these policies create more problems than they solve and that other governmental activities are more effective in helping the economy, but I'll hold them off to another day. Again this is a very simple explanation of what a stimulus package is supposed to do. Corrections and comments are welcomed of course.
Here are further links which should be helpful:
- Encyclopedia of Economics: Keynesian Economics.
- Wikipedia: Keynesian Economics.
