Many analysts have agreed that conservative pundits and politicians have won the "slogan war". Conservatives (cons) have mastered the Madison Avenue art of charging $1.50 for a cup of flavored sugar-water using catchy slogans and imagery.
I encountered just such a slogan the other day when a con proclaimed that "the bailouts and stimulus are guaranteed to fail because they reward losers". These alleged losers include the failing banks and US states with regard to their troubled budgets. (The stimulus explicitly assisted with state budgets for teachers, cops, and firefighters.)
This theory goes that if you "bail out losers", you then encourage more of the same behavior, causing a further slide in the economy. Like most such slogans, it does have an element of truth. It's not entirely false, but rather an exaggeration. Or more specifically, it's a relatively small factor when considered against other factors.
The primary purpose of a Keynesian stimulus is pump money into the economy to spur economic activity. Think of it as monetary caffeine. Even if you give money to the so-called "losers", it still triggers circulation of money as they consume goods and services and pay employees.
Let's take an extreme example and assume we'll give some cash to a drunken bum. The bum may go buy a sandwich, a lottery ticket, and some Jack Daniels. The sandwich money helps out the deli; the lottery ticket helps out the state budget and ticket commission employees; and the Jack Daniels money helps out brewers and distributors. The money "bounces around" the economy.
True, if you keep giving money to the bum year after year, he or she is certainly less likely to get some help and clean up their life. But again this is a longer-term issue. The hurting economy is a here and now issue. We are all in the same boat. You punish both winners and losers by obsessing on incentives for losers.
It reminds me of those old cartoons where the home owner blasts apart his own house in an attempt to kill one annoying fly. Sure, you punished that evil "loser" fly, but took out everything around you to do it.
Now let's address the alternatives. One approach to a sour economy is to do nothing and let it fix itself. That didn't work so well for Hoover. Another approach is to stimulate the economy via tax-cuts. 1/3 of the stimulus plan was tax cuts, by the way. However, the problem with tax-cuts for the wealthy is that they tend not to spend it immediately, which is against the very mechanism of a stimulus. They have the luxury of storing it away until they see a good investment come along.
The poorer one is, the more likely they are to quickly spend any extra money because they have more immediate needs. That's just the nature of economic behavior; not an evil socialist plot to help out the poor. Rich people save, poor people don't, and a smart stimulus plan uses this fact.
Further, banks are infrastructure. Letting them fail could turn our business lending system on its head, making the problem worse for everybody. You don't tear up a road just because the road builders were crooks. Most of the original head honchos of the bad banks are gone anyhow.
The conservative obsession with punishment and revenge often ends up hurting the good guys also.
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