Real Growth or Fake Stimulus

Don Boudreaux’s column in the Christian Science Monitor is an excellent analysis of the stimulus debate in Washington. He starts by explaining why the bipartisan support for rebate checks is grossly misguided. And his point about consumer spending being a consequence of growth rather than a cause of growth is superb:

Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created. If it comes from taxes, the value of Jones’s stimulus check is offset by the greater taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed – whether from foreigners or fellow Americans – for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government. The only other means of paying for such stimulus is for the Federal Reserve to create new money. Unfortunately, this option leads inevitably to inflation. …Spending power is not so much the fuel for economic growth as it is its reward. And the key to economic growth is investment that raises worker productivity.

Professor Boudreaux then explains the types of policies that will boost growth, both in the short run and long run. Smaller government on both the tax side and spending side of the fiscal equation would be very helpful, he explains, and he also makes the critically important point that an easy-money policy from the Fed is the wrong approach:

Mr. Bush should call for a substantial and permanent cut in both capital-gains and personal-income tax rates. …Cutting taxes is, of course, a good thing, but it’s important to know why. The goal would not be to increase consumer spending. Instead, it would be to raise the returns on investment and work. By letting investors and workers keep more of the fruits of their risk-taking, creativity, and efforts, the economy will enjoy more risk-taking, creativity, and effort. Businesses that would otherwise not be started would be created. …Cutting government spending would result in more of the economy’s resources being used by wealth-creating businesses rather than being siphoned away to special-interest groups and boondoggles such as bridges-to-nowhere and Woodstock museums. …Finally, Bush should assure the Board of Governors of the Federal Reserve that he neither expects nor wants them to use monetary policy politically. Reminding them of the wisdom of Milton Friedman, he should strongly urge them to keep a tight rein on the money supply.