With the threat of recession looming, President Bush last week proposed a huge “stimulus” package of almost $150 billion. Bush hopes to deliver $100 billion in tax cuts for individuals and $50 billion in tax cuts for small businesses. As with the rebates of 2001, checks will be likely mailed out to every tax‐paying family in the nation.
Needing little prompting to jump on the giveaway bandwagon, Democrats in Congress propose spending hikes for programs such as food stamps and unemployment insurance. The final package will likely wind up with a lot of new spending plus a mass mailing of rebate checks.
With world stock markets plunging yesterday, and Wall Street deemed likely to follow suit today, a stimulus package might seem called for. Problem is, the ideas on the table may be good politics — but they’re rotten economics.
Bush says the stimulus package will “create jobs” — half a million of them, claims Treasury Secretary Henry Paulson. Yet if it were so easy to create jobs by government fiat, why wouldn’t they do it every year?
Bush and Paulson are in a sense saying that they have solved all the problems of the business cycle, which is ludicrous. Just borrow money and mail checks whenever the economy slows — we’ll never have a recession again!
The first problem with this theory: People aren’t that stupid. The idea is that, if Washington gives people money to increase their consumption, it will prompt businesses to expand their production and hire more workers. Thing is, while producers might notice an upward blip in sales after the rebate checks go out, they’ll know it’s temporary — with sales destined to fall back once the checks are spent.
Businesses just don’t hire more employees or build new factories in response to temporary blips in demand.
So the effect would be like that of the government dropping $150 billion in newly minted dollar bills from helicopters all over the country: Producers wouldn’t increase production, so we’d just have more dollars chasing the same amount of goods. That’s the recipe for higher inflation.
Another problem: Just what might American families spend their rebates on? Probably a lot of children’s toys from China, clothes from Latin America and oil from the Middle East. How much will that help the US economy?
Then there’s the question of where Washington will get the $150 billion for the stimulus. It has to borrow it — ironically, much of it probably from countries like China. So, to a significant extent, foreign creditors will lend us the money to send rebates to families, who’ll go out and buy more foreign goods.