Some Democratic and Republican presidential hopefuls are preaching
economic doom and gloom, disappearing middle class, and failing health
What's their solution? The short answer is
give them more control over our lives. Baltimore's political satirist,
the late H.L. Mencken, explained this strategy, saying, "The whole aim
of practical politics is to keep the populace alarmed, and hence
clamorous to be led to safety, by menacing it with an endless series of
hobgoblins, all of them imaginary."
The imaginary hobgoblin
this time is the threat of a recession, though it is by no means clear
the U.S. economy is in a recession. To head off a recession,
politicians, including President Bush, call for a stimulus package.
we talk about stimulus packages, let's get one question out of the way:
Is there any evidence for the existence of a Santa Claus or Tooth
Fairy? Most grown-ups would probably answer no and ask, "Williams, this
is a serious issue. Why are you talking about silly things like Santas
and Tooth Fairies?" The reason is quite simple. Let's look at it.
White House proposal is to give individuals and households tax rebates
ranging from $800 to $1,600 respectively. Congressional Democrats, in
addition to tax rebates, want a stimulus package that targets the poor
through increases in food stamps and greater unemployment benefits. The
details of different stimulus packages aren't as important as where the
money comes from. You can bet the rent money it won't come from Santa
or the Tooth Fairy.
There are three ways government can get
the money for a stimulus package. It can tax, borrow or inflate the
currency by printing money. If government taxes to hand out money, one
person is stimulated at the expense of another who pays the tax, who is
unstimulated and has less money to spend. If government borrows the
money, it's the same story. This time the unstimulated person is the
lender who has less money to spend.
If government prints
money, creditors, and then everyone else, are unstimulated. As my
George Mason University colleague Russell Roberts said in a NPR
broadcast: "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."
If we are headed
into a recession, these proposed stimulus packages will make little
difference. Previous experiences have shown (1) it takes a long time to
enact tax law, making it too late to prevent a recession, and (2) many
people save a large portion of any tax rebate.
A far more important measure that Congress can take toward a healthy
economy is to ensure that the 2003 tax cuts don't expire in 2010 as
scheduled. If not, there are 15 separate taxes scheduled to rise in
2010, costing Americans $200 billion a year in increased taxes.
to the economic effects of that tax increase are the disincentive
effects of decisions by Americans between now and then in anticipation
of the increases. Economists Tracy Foertsch and Ralph Rector say making
the 2003 tax cuts permanent will annually add $76 billion to the gross
domestic product, create 709,000 jobs and add $200 billion to personal
The call for stimulus packages represents the triumph
of political arrogance over common sense. The United States is a
massive $14 trillion economy. The size of proposed stimulus packages
range from $150 billion to $200 billion, which is about 1 to 2 percent
of our GDP. Economywide, that's a drop in the bucket likely to have
little or no effect.
Congress ought to focus on measures that
create greater long-term productive incentives such as reducing
corporate taxes, estate taxes and personal income taxes as well as