Stimulus Nonsense

On January 20 I criticized Bush’s so-called “stimulus” proposal:

There are two obvious problems with Bush’s proposal. First, it includes no commitment to offsetting the welfare transfers and tax rebates with reductions in federal spending. Second, it seems to promise more federal spending to cover the additional welfare transfers. In other words, spending will go up even more, while tax revenues will go down. This will be achieved through the magic of deficit spending, which necessarily takes real wealth out of the private economy by reducing investments, and/or more inflation. And, to address the problem of unemployment, Bush will pay people more not to work.

Finally some professional economists are chiming in.

Walter Williams writes:

There are three ways government can get the money for a stimulus package. It can tax, borrow or inflate the currency by printing money. If government taxes to hand out money, one person is stimulated at the expense of another who pays the tax, who is unstimulated and has less money to spend. If government borrows the money, it’s the same story. This time the unstimulated person is the lender who has less money to spend. If government prints money, creditors, and then everyone else, are unstimulated.

John Lott, Jr. writes for Fox News (January 28):

The notion that sending people $300 to $600 checks will increase spending is based on an old Keynesian notion. The reason why this won’t work is that the money has to come from someplace. Two options are open: either the government raises taxes or borrows. Everyone understands how taxes merely redistributes the money. But borrowing is no different. Borrowing takes money from those who otherwise would have used it to do everything from investing to buying houses or cars. …

All the “stimulus package” will do is take wealth from some people and give it to others. It will not increase total expenditures. …

The Democrats… know that extending unemployment benefits will increase the unemployment rate, thus making it easier for Democrats to use the economy as an election issue.

Dozens of economic research papers indicate that when you extend or increase unemployment benefits, you lengthen unemployment, because recipients wait until their benefits have been exhausted to take their next job. Even the economists who advise the Democrats know this. Larry Katz, the chief economist at the Labor Department during the Clinton administration, co-authored a study that found that workers are almost three times more successful in finding jobs when benefits are just about to run out.

Lott suggests that the right approach is to “cut marginal tax rates on individuals and companies.” I quite agree, provided that federal spending is reduced comparably.

However, Yaron Brook of the Ayn Rand Institute argued on January 16 that we need more substantive economic reforms to achieve a more prosperous economy:

We don’t need the government to ‘stimulate’ the economy with some new intervention; we need it to liberate us from all its destructive economic intervention that put us in this situation.

We need liberation from environmentalist restrictions on oil drilling and energy production. We need liberation from Sarbanes-Oxley, which treats businessmen as guilty until proven innocent and increases the cost of doing business for every publicly traded corporation. We need liberation from the government’s pervasive regulation and semi-socialization of the health-care market, which have artificially driven up the costs of health care. We need liberation from the intervention of the Federal Reserve, which is destroying our savings by inflating the currency. And we need liberation from countless other forms of government spending; if spending does not decrease, then any ‘stimulus’ tax cuts are simply tax increases for the future.

We should not regard Uncle Sam as an economic Doctor Sam, whom we need to stimulate the heart of the economy with his defibrillator. When the government violates our right to produce and trade freely, it is an economic cancer that needs to be removed from the economy.

Hear, hear.