Theoretically, and in practice, it appears that the policies recommended by Treasury Secretary Paulson and the Federal Reserve Chairman Bernanke were ill advised, since the policies would not increase autonomous spending.

According to macroeconomic theory, the consumption function can be represented by C = ( + c ) + c(1 – t)Y, where ( + c ) is autonomous spending; is autonomous consumption, is transfer, Y is income, c is the marginal propensity to consume, and t is the tax rate. As can be seen, the presence of transfer, , in the hands of consumers increases autonomous transfer spending by the marginal propensity to consume, c, times the amount of the transfers.

However, if government transfers are not in the hands of consumers, as it pertains to the consumer is basically zero and autonomous spending remains at . Hence, governmental transfers to financial institution do not increase autonomous spending and as a result income does not increase from Y₀ to Y₁.

Graphically, government transfers in the hands of consumers would shift the consumption function upwards, increasing aggregate demand from A₀ to A₁ and income (output) from Y₀ to Y₁. However, government transfers in the hands of financial institutions are unlikely to shift the consumption function, because the transfers are not available to consumers.

Providing government transfers to financial institutions does not stimulate the economy, except if banks provide the government transfers to consumers. And, thus far, banks have refused to do so, and if they did, it would be for a fee; a fee would discourage or disqualify most consumers from accessing the transfers diminishing any shift in the consumption function.

It appears that the Administration, Congress, Treasury, and the Fed did not consider the theoretical and practical implications of transferring funds to financial institutions, or the goals of the transfers were different from what was communicated to taxpayers.

Clearly, government transfers can only increase consumption if it is in the hands of consumers.

Nonetheless, in spite of the misallocation of taxpayers’ funds, the lower crude oil prices have begun to stimulate the economy. Lower crude oil prices have rebalanced consumers’ budget.

Lower crude oil price is tantamount to a fiscal stimulus. For instance, gasoline prices at an average of $1.70 per gallon, reduced from a high of $4.50 per gallon, save the average motorist about $30 per fill up. If the average motorist fills up twice a week, yearly savings is approximately ($60 per week times 50 weeks =) $3,000. Over 251 million vehicles were on U.S. roads in 2006 (BTS); therefore, motorists could potentially save more than ($3,000 times 251 million vehicles =) $753,000,000,000 per year due to lower gasoline prices.

Motorists could use the savings to purchase more goods and services, including paying for mortgages, which would expand output (production). And, an increase in output (income) would give rise to further induced spending as consumption rises because the level of income has risen.

Thus, each time production  rises, it gives rise to an equal increase in income, and via the consumption function additional rounds of increase expenditures would occur, expanding production to meet the new demand. The successive series of increases would give rise to what is known as the multiplier effect. And, because the multiplier exceeds unity, a dollar increase in autonomous spending would increase equilibrium income by more than a dollar.

Hence, savings accrued from lower crude oil prices, will transfer consumption from the energy sector to other goods and services, which increases would increase the income of the average consumer and not that of the energy companies.

Lower energy prices will also reduce transportation cost, including energy surcharges on goods and services, resulting in additional consumer savings. Thus, consumers' savings from lower energy cost will stimulate the economy. And, that is why additional stimulus via fiscal policy should take into account the ongoing stimulus due to lower crude oil prices.

Over stimulating the economy would lead to inflation and force the Fed to increase interest rates, which would constrain investment, reduce economic growth, and increase unemployment.

Thus, the stimulus from lower energy prices will restore economic growth, in spite of governmental misallocation of taxpayers’ funds. It is also clear that higher crude oil prices adversely affected consumers’ budget, and hence reduced the general demand for goods and services.  

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