“Stimulus: something that incites or rouses to action; an incentive.” Last week Congress approved a $168 billion economic stimulus package to help our slowing economy. One hundred and sixty-eight BILLION dollars—a staggering amount to most of us, but only a drop in the bucket of our $14 trillion dollar economy.

At first glance, the bill looks like a great idea. Downturn in the economy, spending down, government to the rescue with rebates and tax breaks, more money to spend, spending up, economy back on top—right? Many of us can look forward to receiving a check in the mail in the coming months. While ‘free money’ is always nice, a bit of economic observation may temper our initial excitement.

Economic Lesson #1: There is no such thing as a free lunch. Milton Freidman may have passed on, but his economic teachings have not.

Children generally do not consider the origins of that $20 from Mom and Dad—it’s just ‘free money.’ Assuming the money is rightfully the parents to give (i.e. it is not stolen), there are three possible sources: (1) Mom and Dad took the money from their wallet, thus, although the child’s spending can increase, the parent’s spending must decrease. (2) Mom and Dad borrowed the money from a third party, so their spending doesn’t have to decrease in the short run. In the long run, however, Mom and Dad (or the child) will have to pay the money back, decreasing future consumption. (3) Mom and Dad are lucky enough to actually have a money tree in the backyard that grows money on command.

Those receiving stimulus checks are not children, so they should ask, “Where is this money coming from?” Economist Russ Roberts puts it best.

“The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they’ll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper.”

Of course, the government actually does have a money tree so they could just print more money. Increasing the money supply, however, causes inflation, and inflation makes the money we have worth less.

Economic Lesson #2: Incentives matter. Incentives incite action. What actions will the stimulus package spur?

Imagine parents who give each of their children $20. Do they all go out and spend it? Depending on the child’s preferences, the child may spend all of the money, save all of it, or split the windfall between consumption and savings. Society as well exhibits various preferences and spending patterns. A one-time increase like the stimulus check is more likely to be saved than a permanent increase, which explains their historically lackluster effect on energizing the economy.

Economic Lesson #3: Politicians often focus too much on the short run. The economic stimulus package is like giving children lollipops. The sugar may give them a short burst of energy, but they will soon crash. To ensure long-term energy and health, the children must be provided with a consistent nutritious diet. Real problems underlie our current slowdown, and real reform is necessary. Congress could better focus its energy on actions that provide long run productive incentives, like lowering both corporate and personal income taxes and economic deregulation in general.

Politicians, though, are elected in the short run not the long run. It’s no wonder the economic stimulus package got such quick bipartisan support in an election year. Parents might give their children money with no ulterior motives, but Congress is not so altruistic. What were they really hoping to stimulate? Russ Roberts says, “Usually, the only thing that gets stimulated is a politician’s approval rating.”

Treasury Secretary Henry M. Paulson Jr. has declared the stimulus package “a gift to the middle class.” Parents teach their children to be grateful and not assess the value of a gift, but this is one gift horse you may want to look in the mouth.