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The Recession Alarm By: Walter Williams
The Washington Times | Friday, February 01, 2008


Some Democratic and Republican presidential hopefuls are preaching economic doom and gloom, disappearing middle class, and failing health care industry.

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.

Before 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.

The 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.

Adding 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 income.

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 economic deregulation.


Walter E. Williams is a professor of economics at George Mason University, Fairfax, Va., and a syndicated columnist.


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