Stimulus Stupidity

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.

The moral element is problematic, too. Washington is already running large budget deficits; a stimulus plan would impose another $150 billion in debt on the next generation. Politicians are always criticizing corporations for being too focused on the short‐​term, but they have even worse myopia.

Add to that the dangerous political precedent this sets. One can imagine that every two years, Congress will look to coming elections and be tempted to blow another $150 billion to (supposedly) pump up the economy. That is a recipe for federal deficits spiraling out of control.

The part of a stimulus plan that might make sense is tax cuts for businesses. But if such cuts are only temporary, they’re worthless.

Why? Well, consider one proposal — tax incentives for businesses to buy new equipment this year could be part of a package. At best, this would get some firms to move some of their planned 2009 investments into 2008 to get the tax benefit. That might yield a slight uptick in the nation’s output — at the cost of less investment and a worse economy in 2009.

Instead of short‐​run tinkering, Washington should focus on reforms to improve long‐​run growth, such as permanent cuts in tax rates.

Trying to micromanage short‐​term growth is folly. Economists are no better than weather forecasters in predicting economic short‐​term ups and downs — and they sure as heck can’t control them.

The real driving factor here is political. Politicians want to be seen “doing something” to solve our economic woes. But in the end, a stimulus package might not be such good politics, either. It will work against the GOP goal of making Bush’s tax cuts permanent. And it would push up the deficit, providing an excuse for, say, President Hillary Clinton to raise taxes in 2009.

With luck, partisan bickering over the details will doom any stimulus package. Democrats generally want more spending, while Republicans generally want temporary tax cuts. Let’s hope both sides stay adamant in their priorities.