Tag: stimulus

The Tweedle Dee and Tweedle Dum of Fiscal Policy

The fault line in American politics is often not between Republicans and Democrats, but rather between taxpayers and the Washington political elite. Here are two examples that symbolize why economic policy is such a mess:

First, we have President George W. Bush’s former top aide, Karl Rove, making the case in the Wall Street Journal that the Obama administration has been fiscally irresponsible. That’s certainly true, but as I’ve pointed out on previous occasions (here and here), Rove has zero credibility on these issues. In the excerpt below, Rove attacks Obama for earmarks, but this corrupt form of pork-barrel spending skyrocketed during the Bush years. Rove rips Obama for government-run healthcare, but Rove helped push through Congress a reckless new entitlement for prescription drugs. He attacks Obama for misusing TARP, but the Bush administration created that no-strings-attached bailout program.

Those are examples of hypocrisy, but Rove also is willing to prevaricate. He blames Obama for boosting the burden of government spending to 24 percent of GDP, but it was the Bush administration that boosted the federal government from 18.2 percent of GDP in 2001 to 24.7 percent of GDP in 2009. Obama is guilty of following similar policies and maintaining a bloated budget, but it was Bush (with Rove’s guidance) that drove the economy into a fiscal ditch.

Here’s some of Rove:

The president’s problem is largely a mess of his own making. Deficit spending did not begin when Mr. Obama took office. But he and his Democratic allies have supported, proposed, passed or signed and then spent every dime that’s gone out the door since Jan. 20, 2009. Voters know it is Mr. Obama and Democratic leaders who approved a $410 billion supplemental (complete with 8,500 earmarks) in the middle of the last fiscal year, and then passed a record-spending budget for this one. Mr. Obama and Democrats approved an $862 billion stimulus and a $1 trillion health-care overhaul, and they now are trying to add $266 billion in “temporary” stimulus spending to permanently raise the budget baseline. It is the president and Congressional allies who refuse to return the $447 billion unspent stimulus dollars and want to use repayments of TARP loans for more spending rather than reducing the deficit. It is the president who gave Fannie and Freddie carte blanche to draw hundreds of billions from the Treasury. It is the Democrats’ profligacy that raised the share of the GDP taken by the federal government to 24% this fiscal year. This is indeed the road to fiscal hell, and it’s been paved by the president and his party.

Second, we have Nancy Pelosi claiming that paying people to remain unemployed is a good way of creating jobs. She’s been appropriately mocked for this assertion, but keep in mind that she is accurately regurgitating standard Keynesian theory. It doesn’t matter that Keynesianism didn’t work for Hoover and Roosevelt in the 1930s, didn’t work for Japan in the 1990s, and didn’t work for Bush in 2008. Proponents of this approach have a childlike faith in the Keynesian model and its ability to generate very specific (albeit completely inaccurate) numbers.

Here are two videos that offer the policy-wonk version of a steel cage match. In one corner, we have the Speaker of the House arguing that subsidizing joblessness is a “stimulus” strategy. In the other corner, I explain why transferring money from the economy’s left pocket to the right pocket is not a recipe for growth.

 

Stimulus Now, Restraint Later?

Journalists have been repeating lately that “economists say” that we need yet more government spending now to keep on goosing the economy, even though – to be sure – we will need to cut back on spending at some point in the undefined future, to avoid the fate of Greece. Well, maybe some economists. But I’m sure this “economists agree” claim is no more true today than it was a year ago. Here’s one example, from NYU economist Mario J. Rizzo, coauthor with Cato senior fellow Gerald P. O’Driscoll Jr. of The Economics of  Time and Ignorance:

But let’s look at the arguments made by the opponents of fiscal stimulus.

Some have argued that, as deficits increase, people now offset the putative stimulus by increasing their savings in anticipation of future tax increases. So there is no stimulus now.

Others have argued that, for example, extending unemployment insurance (again) to those unemployed for more than six months will increase the length of unemploymentnow (by subsidizing it) while failing to stimulate.

The stimulus failure is due to the relatively small increase in spending induced by non-permanent increases in income (as unemployment insurance is certainly not permanent source of income). Even more, producers know that the spending is non-permanent so it is unlikely to result in increased employment of labor. Thus, there is no stimulus now; in fact if unemployment continues there is a kind of anti-stimulus now.

Austrians have argued that failing to allow the housing market to adjust by both fiscal and monetary propping-up measures, worsens the situation now by prolonging the inevitable adjustment to a bubble sector. As the adjustment is dragged out and the rest of the economy suffers the dampening effectsnow. This must include the uncertainty as to when (in calendar time) the market will be allowed to adjust.

In empirical work, John Taylor finds that to the extent there was some effect of the fiscal stimulus it was very small and lasted only a matter of two or three months for each major injection. So I guess the long run is four or five months by this reckoning:

Compared with the 2008 stimulus, the 2009 stimulus was larger, but the amount paid in checks was smaller and more drawn out. Nevertheless, there is still no noticeable effect on consumption. I also show the timing of the “Cash for Clunkers” program in Figure 7; it did encourage some consumption, but did not last and cannot be considered an effective method to stimulate the economy. In addition, my analysis of the government spending part of the stimulus is that it too had little positive impact.

Even frameworks that stress future consequences of current stimulus need not be long-run theories in the calendar sense. For example, if the anticipated taxes required to pay off or service current deficits consist of rises in marginal income tax rates, output will be considerably lower and the real interest rates higher in a matter of a couple of years than without stimulus.

The upshot of all of this is that the anti-stimulus economists are not claiming we must trade off benefits now for some long-term pie-in-the-sky benefits. Most are saying: The stimulus route leads to (almost) no benefits now as well as costs later.

Business Roundtable: We Love/Hate Big Government

Regular readers of this blog know that big corporations often are enemies of free markets and individual liberty. So it is hardly suprising to know that the Business Roundtable, a lobby representing CEOs of major companies, supported the wasteful and ineffective stimulus program in 2009 and the bloated new health care entitlement in 2010. Big companies, after all, are quite proficient at working the system to obtain unearned wealth and to rig the rules against smaller competitors.
 
What is surprising, however, is that representatives of that organization now have the chutzpah to complain about a “hostile environment for investment and job creation.” Equally galling, the group has published a document called “Policy Burdens Inhibiting Economic Growth.” We’ve all heard the joke about the guy who murders his parents and then asks the court for mercy because he’s an orphan. The Business Roundtable has adopted that strategy, except this time taxpayers are the butt of the joke. Here’s an excerpt from the Washington Post report:

The chairman of the Business Roundtable, an association of top corporate executives that has been President Obama’s closest ally in the business community, accused the president and Democratic lawmakers Tuesday of creating an “increasingly hostile environment for investment and job creation.” Ivan G. Seidenberg, chief executive of Verizon Communications, said that Democrats in Washington are pursuing tax increases, policy changes and regulatory actions that together threaten to dampen economic growth and “harm our ability … to grow private-sector jobs in the U.S.” …The final straw, said Roundtable president John Castellani, was the introduction of two pieces of legislation, now pending in Congress, that the group views as particularly bad for business. One, a provision of the administration’s financial regulation overhaul, would make it easier for shareholders to nominate corporate board members. The other would raise taxes on multinational corporations. The rhetoric accompanying the tax proposals has been particularly harsh, Castellani said, with Democrats vowing to campaign in this fall’s midterm elections on a platform of punishing companies that move jobs overseas. …Seidenberg polled the members of the Business Roundtable and a sister organization, the Business Council. The result was a 54-page document, delivered to Orszag on Monday, chock full of bullet points about actions taken or considered by a wide array of executive agencies, including the White House Middle Class Task Force and the Food and Drug Administration. We believe the cumulative effect of these proposals will help defeat the objectives we all share – reducing unemployment, improving the competitiveness of U.S. companies and creating an environment that fosters long-term economic growth,” Seidenberg wrote in a cover letter for the document, titled “Policy Burdens Inhibiting Economic Growth.”

Minimum Wage Hikes Deserve Share of Blame for High Unemployment

Even though the Obama Administration claimed that squandering $800 billion on so-called stimulus would  keep the joblessness rate below 8 percent, the unemployment rate today is almost 10 percent. There are many reasons for the economy’s tepid performance, including a larger burden of government spending and the dampening effect of future tax rate increases (tax rates will jump significantly on January 1, 2011, when the 2003 tax cuts expire).

A closer look at the unemployment data, though , suggests that minimum wage laws also deserve a big share of the blame. In this Center for Freedom and Prosperity video, a former intern of mine (continuing a great tradition) explains that politicians destroyed jobs when they increased the minimum wage by more than 40 percent over a three-year period.

Mr. Divounguy is correct when he says businesses are not charities and that they only create jobs when they think a worker will generate net revenue. Higher minimum wages, needless to say, are especially destructive for people with poor work skills and limited work experience. This is why young people and minorities tend to suffer most - which is exactly what we see in the government data, with the teenage unemployment rates now at an astounding (and depressing) 26 percent level and blacks suffering from a joblessness rate of more than 15 percent.

In a free society, there should be no minimum wage law. From a philosophical perspective, such requirements interfere with the freedom of contract. In the imperfect world of politics, thought, the best we can hope for is that politicians occasionally do the right thing. Sadly, the recent minimum wage increases that have done so much damage were signed into law by President Bush. It’s worth noting that President Obama’s hands also are dirty on this issue, since he supported the job-killing measure when it passed the Senate in 2007. When the stupid party and the evil party both agree on a certain policy, that’s known as bipartisanship. In the real world, however, it’s called unemployment.

The Ninth Circuit as a Denial of Service Attack on American Justice

The Supreme Court is expected to decide tomorrow whether to summarily overturn a Ninth Circuit Court ruling, hear an appeal of that ruling, or let the Ninth Circuit’s decision stand. The case involves Arizona’s k-12 scholarship tax credit program that helps families afford private schooling, which the Ninth Circuit found last year to violate the First Amendment.

Before the Ninth Circuit handed down its decision, I predicted that it would rule against the tax credit program, and that it would eventually be overturned by the Supreme Court. The first part of that prediction came to pass, and I still expect the second part to as well. For the reasons why SCOTUS will overturn the Ninth Circuit, see Cato’s brief in the case

Ilya Shapiro (with whom I co-wrote that brief) draws attention today to a great column by George Will in which Will likens the Ninth Circuit to a “stimulus package” for the Supreme Court. It’s a funny analogy, but it’s too benign. It’s more accurate to see the Ninth Circuit as a Denial of Service Attack on American justice. A D.O.S. is a computer attack that prevents Internet surfers from accessing a particular website/server by flooding it with spurious requests. By failing to take Supreme Court precedents seriously, as the Ninth Circuit routinely does, it creates a torrent of ridiculous rulings that demand the Supreme Court’s attention, thereby preventing the nation’s highest court from taking other important cases.

If there is a way for SCOTUS to reprimand the Ninth Circuit for spuriously consuming the nation’s most important legal resources, it would be in the interest of justice for it to do so.

While You Were Watching the Economy, Health Care, Wars…

…the federal government was taking over education. At least, it was moving a lot further in that direction, with Secretary of Education Arne Duncan wielding billions of “stimulus” dollars to coerce states to do Washington’s bidding. And that’s not just my take. It’s also the New York Times’:

Mr. Duncan is a man in a hurry. He has far more money to dole out than any previous secretary of education, and he is using it in ways that extend the federal government’s reach into virtually every area of education, from pre-kindergarten to college.

Race to the Top. SAFRA. National standards. For well over a year, we at the Center for Educational Freedom have issued warnings about all of these escalations of utterly unconstitutional federal power in education, but it has been nearly impossible to cut through all of the huge, non-education stories to get much notice.

Unfortunately, the hits just keep on coming. While the nation is fixated on oil in the Gulf of Mexico and the supposed evils of Wall Street, the administration continues to change the constantly moving target that is the Race to the Top program, now essentially offering individual districts in California a chance to compete in RTTT round two. This despite states explicitly being identified as THE competitors in the current RTTT. It almost makes you conclude that you just can’t trust anything you’re told about RTTT by the administration, and that there is no good reason for any state to expect a fair race.

Thankfully, there is some good news to report. According to the Times, the ever-expansive Department of Education is now about as popular as the tax man – but not quite:

A new survey by the Pew Research Center found distrust of government at its highest level in 30 years. Of all federal agencies, the department of education’s approval rating had fallen most sharply, to 40 percent from 61 percent in 1998. In fact, the department got the lowest rating of any federal agency, including the Internal Revenue Service.

And that is with ED operating largely under the radar. Imagine if people actually knew what Duncan and company were doing!