Finance Expert Tells Why Stimulus Will Not Work

Like the common cold, an economic recession can be an unpleasant experience. Unfortunately, it is also overcome in the same way ó by time.

"Most economist agree that the government trying to stimulate the economy is like taking medicine when you have a cold," said Richard Warr, a finance expert and professor at Kansas State University. "That is why most economists think the Congressí efforts to stimulate the economy will result in a worse situation for the U.S. than if they didnít fight it at all."

Warr gives several reasons why the U.S. Congress should not attempt to stimulate the economy. The first reason is the way they choose to spend the relief money. He says most economists say that Congressí proposal directs the funding to the wrong things.

"All this pork barrel spending wonít get anything accomplished," he said. "They have all these little pet projects that get all the money. What they need to do is use funds in a more generalized way."

Along with that, Warr says the timing of the proposed stimulus package is a problem. With the next financial quarter ending in December, he thinks we will probably be out of the recession before the stimulus takes effect.

"It takes time to make all these legislative decisions," he said. "To technically be in a recession, the GDP must show negative growth for two quarters. We are considered in a recession because of the reports from June and September. Sure the stock market is still bad in areas, but it really hasnít been bad overall in the last couple of months. The Dow Jones is down a very small amount and the Nasdaq is up a little. When the next report is released in January, we will be on our way out."

Another problem Warr sees with the Congressí package is the effect it will have on the budget deficit. Borrowing money to stimulate the economy will result in one of two things, raising taxes or increasing interest rates. According to Warr, those are the only options Congress will have when they try to pay back the money.

"Interest rates are low right now," Warr said. "If Congress borrows the money and attempts to stimulate the economy, those rates will definitely increase. If they donít increase, then we can plan on raising taxes.

The money will be paid back somehow."

Warr received his doctorate from the University of Florida in 1998. His areas of research are equity valuation, inflation and stock market structure. He joined K-State in August 1999.

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