Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”     Ronald Reagan

January 24, 2008

Bush, Congress To Pass Ineffective “Stimulus” Package

by Doug Mataconis

It hasn’t been made official yet, but it looks like the Bush Administration and Congress have reached a deal on an economic stimulus package, the major component of which will include tax rebates of up to $ 600 per person:

WASHINGTON (CNN) — American taxpayers would get checks of several hundred dollars from the federal government under a plan to stimulate the economy, sources said Thursday.

Congressional leaders of both parties were talking with their membership to sell the plan, sources said.

Sources on Capitol Hill and at the Treasury Department said congressional and White House negotiators agreed upon checks of $600 per individual and $1,200 per couple who paid income tax and who filed jointly.

People who did not pay federal income taxes but who had earned income of more than $3,000 would get checks of $300 per individual or $600 per couple.

A Democratic aide and Republican aide said there will be an additional amount per child, which could be in the neighborhood of $300.

Concidentally, Don Boureaux points out in today’s Christian Science Monitor why such “tax rebate” plans won’t do anything to stimulate the economy:

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.

All Americans wind up with more dollars in their wallets but also paying higher prices in the stores. Prosperity is not created by raining down upon the populace more monochrome pictures of dead statesmen.

Stimulus funded with newly created money is especially harmful. Most obviously, the inflation it causes prompts investors to flee the dollar. But because inflation can take time to show up, injecting new money into the economy can create a temporary sense that consumers and investors are wealthier than they really are. Such a false sense dangerously delays the necessary pruning of unfruitful investments. A bad economy is prolonged.

Creating a “temporary sense” that the economy isn’t really that bad is, of course, exactly what the politicians are aiming for here. They’re not aiming to actually fix what’s wrong, they’re aiming to make it seem like they fixed it in time for the upcoming elections. Which is why both political parties, Republican and Democrat, are behind the idea and why it’s taken less than a week from when President Bush first spoke about a stimulus package for Congress and the White House to reach an agreement. It’s in both their interests to make people think that they’re doing something that will help, even if it won’t.

Instead of the temporary fixes that Washington is concentrating on, Boudreaux says that politicians should focus on fixing the fundamentals and stop engaging in policies that discourage investment and growth:

First, Mr. Bush should call for a substantial and permanent cut in both capital-gains and personal-income tax rates.

Next, he should insist on a large reduction in federal spending, including elimination of all agricultural subsidies. While he’s showing such courage, he might as well unconditionally endorse free trade.

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. Likewise with machinery and training that increases worker productivity. Investors worldwide would flock to take advantage of these lower tax rates, further increasing productive investments.

(…)

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.

Of course, as Boudreaux notes, none of these policies will have the immediate impact that politicians desire, and none of them will be as readily apparent to voters as a $ 1,200 check in their mailbox, which is exactly why thery won’t be adopted.

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11 Comments

  1. None of this surprises me.

    In “The Price of Loyalty” Paul O’Neill discussed the last Bush “stimulus” package (the $300 rebate when Bush first took office) and how he tried to talk Bush out of it because he and Alan Greenspan realized that it was too little money to provide any real stimulus but big enough to waste a surplus that could be better spent elsewhere. O’Neill made his case to Bush, rationally and logically, after which Bush (who’d sat through the entire presentation with a blank fucking stare while asking no questions) said that he couldn’t go back on the rebate because he’d already decided to go through with it.

    To be blunt, stuff like this gets passed because our top executive position is held by a fucking arrogant retard (with apologies to the mentally handicapped). Bush makes decisions without bothering to think them through (and often operating from a position of more or less complete ignorance), he refuses to reverse or even reconsider his positions when people smarter or better-informed than himself point out the flaws, and he doesn’t give a shit what damage his decisions do as long as he personally doesn’t look weak or indecisive. He’s been this way consistently for seven years.

    Face it, Dubya is a basically stupid person who doesn’t realize that he’s a stupid person because his primary opponents (Pelosi, Reid, Kerry) have also been basically stupid people who are incapable of outsmarting him. Don Boudreaux or anyone else with a brain can cite Milton Friedman, Ludwig von Mises, or Adam Smith all they want to argue against the rebate, Bush doesn’t care as long as he’s already made up his mind. The only thing that would actually convince that thick-headed fuck in to change any of his policies is a goddamned pistol-whipping.

    Comment by UCrawford — January 24, 2008 @ 11:08 am
  2. Screw it…I guess the best advice to offer for anyone getting the rebate is to pay off any debts you have with it (like credit cards) or if you’ve got no debts spend it on something you’ll get actual use out or at least enjoy. Saving it damn sure isn’t going to do you any good.

    Comment by UCrawford — January 24, 2008 @ 11:13 am
  3. UCrawford,

    Don’t be so quick to not share the blame. The idiots in Congress have just as much economic ignorance. Foolish ideas are easy to understand when all leaders are fools.

    Comment by trumpetbob15 — January 24, 2008 @ 11:29 am
  4. trumpetbob,

    Oh, I completely share the blame with Congress…Pelosi and Reid are absolutely pathetic as leaders and it’s mind-boggling to me that so many utterly incompetent people could rise to leadership positions in both parties. I think this goes beyond the traditional “I hate Congress” gripes that everybody has from time to time…Pelosi is perhaps the most inept leader I’ve ever seen hold the top spot for any group. She’s incompetent, she’s insecure, she’s hyper-defensive, and above all she’s weak and easily rattled (it was reported that she actually reversed her position on one bill because the Republicans yelled at her…actually physically surrounded her and yelled at her, and she caved). She can’t even get her own party to back her choices for leadership positions in Congress (Steny Hoyer completely undermined her to swipe a leadership position from her choice Matt Murtha and she let him get away with it). How does somebody that pathetic hold onto the top spot for a year!?! Jim Wright or Tip O’Neill would have chewed her up and spit her out…probably after publicly reducing her to tears. Hell, if she were my grandma, I’d change my last name out of pure shame.

    Even the leftists over at Huffington despise her:

    http://www.huffingtonpost.com/darin-murphy/weak-has-a-face-and-its_b_66987.html

    I mean, the Democrats are matching wits with arguably the stupidest, most unpopular and politically inept man ever to sit in the White House, and they’re losing. They’ve got the purse strings, they’ve got the power, yet they’re losing to an utter moron. The kicker is that they supposedly came in on a platform of ending the Iraq War and all they had to do was pass no supplemental funding bills to force a troop withdrawal or just let him veto what they gave him. They didn’t have to override a veto, they just had to let Bush veto whatever bill they sent him or refuse to send him anything and they’d win. Literally they had to do nothing and they’d win politically and end the war…and they still fucked it up!!! How do you fuck up something that simple?

    Comment by UCrawford — January 24, 2008 @ 1:33 pm
  5. trumpetbob,

    But I also recognize that Bush is the one driving this train on proposals like this stupid rebate so as “leader” he gets the lion’s share of the blame.

    Comment by UCrawford — January 24, 2008 @ 1:52 pm
  6. “…is a goddamned pistol-whipping.”

    Heh. Now that’s funny. Sure it’s true as well, but thanks for the laugh.

    s.s.

    Comment by Steve S. — January 24, 2008 @ 4:57 pm
  7. Steve,

    I aim to please. :) Although honestly I believe that really is the only thing that would work. After I wrote that I saw that Slate actually did a piece a couple of weeks ago about how the Dubya looks at the world that I feel validates my opinion:

    http://www.slate.com/id/2182222/

    Comment by UCrawford — January 24, 2008 @ 7:06 pm
  8. Well done, Doug! Great article! I was trying to explain this to my colleagues and friends yesterday!

    Comment by David Wilson — January 25, 2008 @ 6:26 am
  9. I think Doug got it right. This has more to do with politicians wanting to appear to “do something” to help the economy than anything else. Any presidential candidate who would try to say that people need to make responsible choices (like save money, live within their means, and not run up huge credit card debts) would not have much of a chance of being elected. The politicians understand this and they get by with these feel good policies because of the general lack of anything resembling economic literacy in this country.

    Comment by Stephen Littau — January 25, 2008 @ 12:11 pm
  10. Economic Malady – Stimulus Insufficient

    The underlying problem with the economy is an extreme maldistribution of income between the working class and the capital owners. When a CEO can make 300 million dollars while an average worker’s wages haven’t even kept pace with inflation what results is a dysfunctional market economy starved for consumption spending. The average American has had to fuel his/her spending with debt obtained by borrowing on the equity within their home – that phantom equity has now evaporated.

    In order to correct this out of balance condition there needs to be laws in place (similar to the anti-Trust legislation) that caps the annual income of all capital owners and their surrogates (CEOs, CFOs, etc.) at a specific federal percentage above that of the highest paid worker within their respective firm. Also, we need to eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.

    Essentially, FDR was accurate when he characterized the Great Depression as an out-of-balance Economic malady. Rural income prior to the Great Depression was significantly lower than urban income, now (overvalued home equity) as then there was unlimited amounts of overvalued phantom equity flowing into the stock market, the income differential between labor and capital while nowhere near the current astronomical level was still much higher than sustainable. There in lies the root cause of the out-of-balance condition that precipitated the Great Depression. Any system including the market economy that gets to far out balance does not function properly. Certain constraints need to exist to keep the market economy from slipping into a dysfunctional state. Balance is the essence of stability nothing short of this will guarantee permanence.

    John Maynard Keynes –
    ?? If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes its effects in increasing the propensity to consume is, of course, all the greater.
    ??Aggregate consumption depends mainly on the amount of aggregate income.
    ??Consumption – to repeat the obvious is the sole end and object of all economic activity.
    ?? We cannot, as a community, provide for future consumption by financial expediants [stocks, bonds, 2nd mortgages on home loans, etc] but only by current output.
    ??Capital is not a self-subsistent entity existing apart from consumption.
    ??Consumption is directly tied to the level of employment.

    My Proposed Program
    • 2 year 800 billion emergency Infrastructure Investment Jobs Creation Program (IIJCP) aimed at building new interstate highways, mass transit systems, schools, bridges, public hospitals, libraries, and assorted public buildings.
    • Eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.
    • Taxation of corporate profits in the amount of 95% for firms that exceed a threshold level of jobs outsourced to a foreign country.
    • Taxation at the rate of 80% on individual yearly income received from any corporation, not-for-profit organization, or any form of legal entity where the total income exceeds the U.S. average yearly median individual income by 200%.
    • Fair trade agreements that ensure nations will offer decent wages, humane working conditions, and sound environmental policies.
    • A nationalized health care system for all U.S. citizens.
    • An effective federally funded tuition assistance program for U.S. citizens targeted at professions in demand.
    • Repeal all legislation that inhibits the right’s of individuals to organize under labor unions regardless of position or any other currently disqualifying classification.

    My Observations:
    • An economy can only function when a large proportion of the populace is engaged in the economy thus able to purchase what is produced.
    • If price is inelastic and labor remuneration static demand will fall due to reductions by industries in their capital base (the most important being labor).
    • Firms forced to compete (those that are not oligopolies) in an economic environment where demand is declining will still compete on price but efficiency gains and operating cost reductions by nature have marginal declining utility whereby a point is reached when the firm’s factors of production (land, labor, or capital) must be slashed. These cuts in factors of production will have a multiplicative effect throughout an economy resulting in an ever building ‘wave’ of economic decline.
    • It is important to keep in mind that an economy cannot continue to grow when long-term consumption continues to decline. This in turn ties directly to reductions in the factors of production to accommodate continual long-term reductions in consumption.
    • When geographical barriers, constraints to the free flow of labor resources, underemployed resource utilization, similar knowledge distribution across all nation state’s, and nation state governmental inconsistency exists no global free market can exist and thereby at the nation state level no significant corresponding opportunity cost for engaging in one form of economic endeavor over another.

    Comment by SoftwareEng — January 26, 2008 @ 5:12 am
  11. Economic Malady – Stimulus Insufficient

    The underlying problem with the economy is an extreme maldistribution of income between the working class and the capital owners. When a CEO can make 300 million dollars while an average worker’s wages haven’t even kept pace with inflation what results is a dysfunctional market economy starved for consumption spending. The average American has had to fuel his/her spending with debt obtained by borrowing on the equity within their home – that phantom equity has now evaporated.

    In order to correct this out of balance condition there needs to be laws in place (similar to the anti-Trust legislation) that caps the annual income of all capital owners and their surrogates (CEOs, CFOs, etc.) at a specific federal percentage above that of the highest paid worker within their respective firm. Also, we need to eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.

    Essentially, FDR was accurate when he characterized the Great Depression as an out-of-balance Economic malady. Rural income prior to the Great Depression was significantly lower than urban income, now (overvalued home equity) as then there was unlimited amounts of overvalued phantom equity flowing into the stock market, the income differential between labor and capital while nowhere near the current astronomical level was still much higher than sustainable. There in lies the root cause of the out-of-balance condition that precipitated the Great Depression. Any system including the market economy that gets to far out balance does not function properly. Certain constraints need to exist to keep the market economy from slipping into a dysfunctional state. Balance is the essence of stability nothing short of this will guarantee permanence.

    John Maynard Keynes –
    If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes its effects in increasing the propensity to consume is, of course, all the greater.
    Aggregate consumption depends mainly on the amount of aggregate income.
    Consumption – to repeat the obvious is the sole end and object of all economic activity.
    We cannot, as a community, provide for future consumption by financial expediants [stocks, bonds, 2nd mortgages on home loans, etc] but only by current output.
    Capital is not a self-subsistent entity existing apart from consumption.
    Consumption is directly tied to the level of employment.

    My Proposed Program
    2 year 800 billion emergency Infrastructure Investment Jobs Creation Program (IIJCP) aimed at building new interstate highways, mass transit systems, schools, bridges, public hospitals, libraries, and assorted public buildings.
    Eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.
    Taxation of corporate profits in the amount of 95% for firms that exceed a threshold level of jobs outsourced to a foreign country.
    Taxation at the rate of 80% on individual yearly income received from any corporation, not-for-profit organization, or any form of legal entity where the total income exceeds the U.S. average yearly median individual income by 200%.
    Fair trade agreements that ensure nations will offer decent wages, humane working conditions, and sound environmental policies.
    A nationalized health care system for all U.S. citizens.
    An effective federally funded tuition assistance program for U.S. citizens targeted at professions in demand.
    Repeal all legislation that inhibits the right’s of individuals to organize under labor unions regardless of position or any other currently disqualifying classification.

    My Observations:
    An economy can only function when a large proportion of the populace is engaged in the economy thus able to purchase what is produced.
    If price is inelastic and labor remuneration static demand will fall due to reductions by industries in their capital base (the most important being labor).
    Firms forced to compete (those that are not oligopolies) in an economic environment where demand is declining will still compete on price but efficiency gains and operating cost reductions by nature have marginal declining utility whereby a point is reached when the firm’s factors of production (land, labor, or capital) must be slashed. These cuts in factors of production will have a multiplicative effect throughout an economy resulting in an ever building ‘wave’ of economic decline.
    It is important to keep in mind that an economy cannot continue to grow when long-term consumption continues to decline. This in turn ties directly to reductions in the factors of production to accommodate continual long-term reductions in consumption.
    When geographical barriers, constraints to the free flow of labor resources, underemployed resource utilization, similar knowledge distribution across all nation state’s, and nation state governmental inconsistency exists no global free market can exist and thereby at the nation state level no significant corresponding opportunity cost for engaging in one form of economic endeavor over another.

    Comment by SoftwareEng — January 26, 2008 @ 5:13 am

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