Topic: Government and Politics

The Last Word on Fiscal Stimulus?

From “the best-selling Principles of Economics textbook [which] has been teaching students in a clear, unbiased way for 40 years.” Campbell R. McConnell, Economics: Principles, Problems, and Policies.  McGraw-Hill, 7th edition, 1978.

The Last Word: The Impotence of Fiscal Policy
Some economists feel that fiscal policy is an impotent and unpredictable stabilization tool.

Well, as I wrote in a 1977 Tax Review article (reprinted 1w permission of the Tax Foundation, Inc.):

The real question is whether or not conventional fiscal policy works as advertised. If fiscal policy works, and its impact is properly measured by the size of the full employment deficit, then it should be possible to find some correlation between either the level or direction of the full employment budget and some measure of current or subsequent economic activity. George Terborgh tried to find some such link back in 1968, in The New Economics, but found only a weak correlation that turned out to be perverse. That is, larger full employment surpluses were associated with faster economic growth. More rigorous tests by economists at the St. Louis Fed, and again at Citibank, had no more luck in uncovering the magical properties of the full employment budget. A sharp shift toward larger full employment deficits did not prevent the recession of’ 1953-54, for example, nor the mini-recession of 1967. In 1946, a $60 billion reduction of Federal spending (equivalent to $400 billion today) was followed by a vigorous boom, and a combination of tax cuts and higher spending in 1948 (the equivalent of S75 billion today) was followed by a sharp recession.

The theory of fiscal policy is almost as messy as the evidence. If deficit spending is financed by borrowing from the private sector, there is no obvious stimulus-even to that undifferentiated thing called “demand.” Whoever buys the government securities surrenders exactly as much purchasing power as is received by the beneficiaries of Federal largess. There would be a net fiscal stimulus only if there were no private demand for the funds needed to cover the added Treasury borrowing. Otherwise, lendable funds are just diverted from market-determined uses to politically determined uses.

There may be a stimulus in some circumstances if the deficit is financed by a more rapid increase in the money supply, but this is really a monetary stimulus, not a purely fiscal effect.

In the long run, resources allocated through the government must displace those allocated through markets, and growth of government spending must be at the expense of the private sector. The government has only three sources of revenue – taxes, borrowing, and printing money – and increasing any one of those must reduce the private sector’s command over real resources. Although deficit spending may at times be a short-run stimulus to nominal demand, it is also a long-run drag on real supply-siphoning resources from uses that would otherwise augment the economy’s productive capacity, and instead diverting those resources into hand-to-mouth consumption through government salaries, subsidies, and transfer payments.

So, the theory and evidence suggests that fiscal policy is essentially impotent, or at least unpredictable, except as a device to promote inflationary monetary policy and/or to reduce investment and growth.

Historic and Transformational

Speaker Nancy Pelosi says that the massive spending bill Congress is about to pass is “historic and transformational.” She has a point. Here’s a visual of what it’s helping to do to the federal deficit:

(Source: Strategas Group via PowerlineBlog)

The federal budget is already plunging into deficit. It hardly seems the time to add another $800 billion of spending. Doing so may very well prove to be transformational, like pushing the economy over a cliff.

The Washington Post reports, “The Obama administration’s economic stimulus plan could end up wasting billions of dollars by attempting to spend money faster than an overburdened government acquisition system can manage and oversee it, according to documents and interviews with contracting specialists.”

And as noted here previously, lobbyists have loaded the bill down with special-interest provisions, such as “a controversial proposal for a magnetic-levitation rail line between Disneyland, in California, and Las Vegas,” a project favored by Harry Reid. A levitating train from Fantasyland to a city built on gambling. If that isn’t a metaphor for this bill, I don’t know what is.

But it’s not the only one. The Post also notes funding for lithium batteries, Filipino veteran payments, small shipyards, North Carolina-made TSA uniforms, and “clean coal.”

Given all that, it’s especially disappointing that President Obama and Congress continue to ignore his campaign promise to let all legislation be publicly available for five days before he signs it. In this case, even members of Congress had trouble getting their hands on the actual $790 billion bill they were expected to vote on. Congress should listen to Bill Niskanen:

This is the fifth time in my adult life that the president has asked for or asserted unprecedented authority on an expedited basis with little or no congressional review. Each of the prior occasions turned out to be a disaster.

Obama’s Shock Doctrine

At the Guardian, I argue that President Obama and Rahm Emanuel are carrying out just what Naomi Klein predicted in The Shock Doctrine. Except that, as usual, it’s not deregulation and budget cutting that governments turn to in times of crisis. It’s more money and more power:

Last year the US economy was hit with one shock after another: the Bear Stearns bail-out, the Indymac collapse, the implosion of Fannie Mae and Freddie Mac, the AIG nationalisation, the biggest stock market drop ever, the $700bn Wall Street bail-out and more — all accompanied by a steady drumbeat of apocalyptic language from political leaders.

And what happened? Did the Republican administration summon up the spirit of Milton Friedman and cut government spending? Did it deregulate and privatise?

No.

It did what governments actually do in a crisis — it seized new powers over the economy. It dramatically expanded the regulatory powers of the Federal Reserve and injected a trillion dollars of inflationary credit into the banking system. It partially nationalised the biggest banks. It appropriated $700bn with which to intervene in the economy. It made General Motors and Chrysler wards of the federal government. It wrote a bail-out bill giving the secretary of the treasury extraordinary powers that could not be reviewed by courts or other government agencies.

Now the Obama administration is continuing this drive toward centralisation and government domination of the economy. And its key players are explicitly referring to their own version of the shock doctrine. Rahm Emanuel, the White House chief of staff, said the economic crisis facing the country is “an opportunity for us”. After all, he said: “You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before” such as taking control of the financial, energy, information and healthcare industries….

Occasionally, around the world, there have been instances where a crisis led to free-market reforms, such as the economic reforms in Britain and New Zealand in response to deteriorating economic conditions. Generally, though, governments seek to expand their power, and they take advantage of crises to do so. But they rarely spell their intentions out as clearly as Rahm Emanuel did.

Stop Hiding the Stimulus Bill

Here’s Paul Blumenthal of the Sunlight Foundation on the closed process being used to ram through the deficit-spending/economic stimulus bill:

[I]t is not just Republicans who are being denied access to the bill. Reporters, bloggers, and the general public are being denied an opportunity to review one of the most important pieces of legislation sent through Congress in a long time. Anyone who wants should express that, whatever the partisan reasons for denying access to the bill, the American people deserve a right to review this legislation. Slamming it through without letting anyone see, save for 7 or 8 congressmen and some staff, is not fair to the public or the legislative process.

This is a dangerous practice that the Democrats ran against in 2006 and now, in the majority, are unfortunately using to block their opposition’s attacks. The majority Democrats should maintain their previous position on running the most open and honest government by allowing the public to review this legislation. Anything less is unacceptable.

Nadya Suleman’s Octuplets & the Perils of Public Charity

The AP reports that you and I will be paying the cost of rearing Nadya Suleman’s newborn octuplets –  as well as her other six children – through various state and federal welfare programs:

Even before the 33-year-old single, unemployed mother gave birth to octuplets last month, she had been caring for her six other children with the help of $490 a month in food stamps, plus Social Security disability payments for three of the youngsters. The public aid will almost certainly be increased with the new additions to her family.

Also, the hospital where the octuplets are expected to spend seven to 12 weeks has requested reimbursement from Medi-Cal, the state’s Medicaid program, for care of the premature babies, according to the Los Angeles Times…

In California, a low-income family can receive Social Security payments of up to $793 a month for each disabled child. Three children would amount to $2,379.

The Suleman octuplets’ medical costs have not been disclosed, but in 2006, the average cost for a premature baby’s hospital stay in California was $164,273, according to the U.S. Department of Health and Human Services. Eight times that is more than $1.3 million, and the average cost for just one cesarean birth in 2006 was $22,762 in California.

A reasonable person might ask, “So what?  Poor kids need help.  Would you rather let them die?”  That certainly does not seem to be the answer.  Yet there are perils inherent in having government come to the rescue. 

One challenge confronting both public and private charity is known as the Samaritan’s dilemma: any effort to help the needy inevitably discourages self-help.  People at the margins don’t work as hard, or even take deliberate advantage of others’ altruism, which increases the number of people “in need.”  That appears to have happened in Suleman’s case:

Word of the public assistance has stoked the furor over Suleman’s decision to have so many children by having embryos implanted in her womb…

Suleman received disability payments for an on-the-job back injury during a riot at a state mental hospital, collecting more than $165,000 over nearly a decade before the benefits were discontinued last year.

Some of the disability money was spent on in vitro fertilizations, which was used for all 14 of her children, Suleman said. She said she also worked double shifts at the mental hospital and saved up for the treatments. She estimated that all her treatments cost $100,000.

The First Peril of Public Charity is that government does a relatively poor job of discouraging such opportunistic behavior.  Food stamps, Social Security disability payments, and Medicaid benefits are entitlement programs.  So long as Suleman meets the statutory eligibility criteria, she is legally entitled to benefits no matter how much she may be milking the system.  It is extremely difficult to tailor government eligibility rules (whether statutory or regulatory) to prevent all the possible forms of abuse.   And even if some government bureaucrat tries to cut off welfare recipients who are abusing the system, those recipients can sue the government and there are legions of lawyers who will help.  Private charity is much better at discouraging opportunistic behavior by tailoring assistance to the truly needy.  Did Suleman and her children truly need all the public assistance they had been receiving?  Would she have been able to afford in-vitro fertilization had she not been on public assistance?  If the availability of additional charity were less certain, would she have tried to get pregnant again?  Maybe, but probably not.

The Second Peril of Public Charity is that taxpayers and politicians respond to the First Peril of Public Charity by insisting that government take away people’s rights.  Much of the crusade against smokers’ and restaurateurs’ rights is justified by the need to limit government spending on medical care for smoking-related illness.  Ditto the crusade to limit your right to eat fatty foods. 

Suleman’s case has led taxpayers to recommend some startling policy responses:

On the Internet, bloggers rained insults on Suleman, calling her an “idiot,” criticizing her decision to have more children when she couldn’t afford the ones she had, and suggesting she be sterilized.

“It’s my opinion that a woman’s right to reproduce should be limited to a number which the parents can pay for,” Charles Murray [not the American Enterprise Institute scholar] wrote in a letter to the Los Angeles Daily News. “Why should my wife and I, as taxpayers, pay child support for 14 Suleman kids?”…

“From the outside you can tell that this woman was playing the system,” host Bryan Suits said on the “Kennedy and Suits” show on KFI-AM. “You’re damn right the state should step in and seize the kids and adopt them out.”

Emphasis added.

Those responses are a predictable consequence of government charity.  They reflect the same selfish rationale that the Church of Universal Coverage uses to argue for eliminating your right to choose health insurance. 

If somebody is abusing generosity, the appropriate response is not to take away their rights but to take away the generosity. (Some curtailment of parental rights can be justified if the children are in danger. But we don’t yet know if Suleman is going to get a reality-TV deal out of this.) Private charity can do that. Government is ill-equipped to do so, and so our rights come under attack.

The irony is that the Left’s adamant support for government charity is eroding smokers’ rights, property rights, dietary rights, medical rights, and now even the Left’s cherished reproductive rights – making the Left less and less liberal by the day.

A Simple Way to Enrich Everyone, Instantly

Hey Slate! I can commit the broken window fallacy too. Can I write a business column? Pretty please?

The economy of the Washington, D.C., area has boomed in recent decades not so much because the federal government has expanded its payrolls massively but because private government contractors have been thriving. As the Bureau of Labor Statistics notes, in January, “the large areas with the lowest jobless rates in December were Oklahoma City, Okla., and Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va.” – a capital city, and the capital city.

I have a modest proposal, then.

Washington, DC is only one city, but what we really want is to enrich the whole country. I therefore propose that we increase all federal taxes by a factor of sixty, so that federal spending, which now only enriches the 5 million in the DC area, will be enough to enrich all 300 million Americans.

We can spend it on a proportionate number of “private” government contractors if it helps. That’s fine with me – you know how we free-marketers love anything calling itself “private.” All that matters is that we keep borrowing, taxing, and inflating ourselves into the wealth that Washington so obviously has. That, you see, is the power of private enterprise.

$800 Billion Is a Lot of (Other People’s) Money

Even though Keynesian theory does not make sense, President Obama wants a so-called stimulus that will increase the burden of government spending by about $800 billion (including the additional interest on government debt, more than $1 trillion). This is not pocket change. In this short video, Michelle Muccio of the Acton Institute explains how this amount of money would be enough to abolish the payroll tax for the rest of the year.

Why don’t politicians choose tax relief? As John Kerry stated, people can’t be trusted to spend their own money.