Everybody Wants To Do Something Good For The Nation

By Author: rdfgdr
Total Articles: 105
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Everybody wants to do something good for the nation right now. But we should approach any "economic stimulus" from Washington with skepticism. President Bush has asked for a program between $ 60 billion and $ 75 billion, mostly based on tax breaks for business. House Republicans want even greater tax relief. Senate Democrats may push for more federal spending on security- related public works and unemployment relief. Many of these measures may serve a public good. For example, we should build rail networks and improve security. But because the money comes from productive taxpayers, we should be prudent in spending it. And none of the proposals will stop the recession.
The Sept. 11 terrorist attack brought us strange days, but it didn't repeal history and experience. Old-time New Deal stimulus used heavy federal spending — even running a deficit — to offset the loss of private investment in a downturn. The idea was to "prime the pump" with public jobs and projects to get people working again. It was an oversimplification of the ideas of British economist John Maynard Keynes, so it's probably unfair that it ...
... was called "Keynesian".
Keynesianism went into hiding in the 1980s, when none of the old remedies could stop stagflation, and Ronald Reagan returned classical economics to the forefront of Washington's policy. But many social democrats (called "liberals" by the media) still advocate government stimulus. Unfortunately, the post- World War II evidence suggests pump priming never arrived in time to seriously influence the business cycle. It took months or years for new pro-grams to gain hold, and by that time the economy was already in expansion. Even in the Great Depression, Roosevelt's alphabet-soup programs did little to provide long-term jobs or capital formation. Although the Depression started in 1929, one of its worst periods was 1936-37.
Republican tax-cutting proposals come from a different history: Reagan's tax reductions in 1981 . These cuts did help the economy revive, but by freeing capital and increasing incentives rather than by giving a "stimulus" pushes. Also, Reagan's cuts were broad- based reductions in tax rates that were exceptionally high (70 percent in some cases). The current tax proposals involve tinkers and tucks. We would see little capital rationally freed by these moves. And the temptation to bestow Republican corporate welfare would be irresistible. We could see serious depletion of government revenue, even as Washington is spending billions in the war effort.
The painful reality is that recessions happen for reasons beyond political convenience. Economies build up imbalances and bad bets that must be cleaned up by the business cycle. Attempts to paper over these forces are dangerous, merely postponing and exaggerating the reckoning. If politicians want to do something, let them maintain the sound money and fiscal policies that helped birth the last boom. It's not an appealing program. It just works.