Let's get real about the 'stimulus'

Knoxville News Sentinel

Sunday, September 5, 2010

As the president once famously said, "This is a teachable moment." The economy is in the doldrums. Despite all of the pronouncements of recovery, "green shoots" and upturns touted by the administration, the simple truth is what most of us know - the economy stinks.

Most of the growth numbers now are around 2 percent and are not enough to prompt job creation. The "green shoots" of recovery were all transitory, reflecting job growth and spending growth in the government but not the private sector.

Markets and people are not stupid. Temporary stimulus packages and tax cuts do not have a measurable impact on the economy because all parties know that it is temporary. Economic theory tells us that no rational person would alter their spending, consuming or investing behavior because of transitory changes. The empirical evidence bears it out.

Consumers and businesses all know that they must improve their balance sheets by paying off debt, and that is what they are doing. So what is the "teachable moment"? It is that big government spending does not work in taking an economy out of a recession. Call this the death of Keynesianism. As Anatole Kaletsky has said, we now recognize that both governments and markets make catastrophic mistakes, and we don't trust either of them. The only difference is that markets will correct their mistakes while governments will just compound them.

There are still economists like Paul Krugman who say the government needs to spend more to get us out of the Great Recession. But we all know better. The evidence is to the contrary - increased government spending makes matters worse and Americans know it. Two-thirds of us do not support another stimulus package. Stimulus does not work because the government has got to get the money from somewhere to spend. If it gets the money by borrowing in financial markets, then "crowding out" takes place - private investment falls because of the government borrowing. If the money comes from printing it, then the value of money falls in international markets and the potential for inflation rises. In neither instance will private investment spending increase, without which there is no job creation, capital or economic growth.

So how can we end the Great Recession?

It's actually rather simple - enact permanent incentives rather than disincentives. Let's call the program "Liberate to Stimulate." The regulatory burden of government has been estimated to be $1.4 trillion annually, which ironically is the size of the government deficit. Stop the uncertainty and reduce government's reach. Eliminate the capital gains tax and the corporate income tax. Permanently reduce the burden of regulation on business. Roll back health care "reform." Kill cap and trade. Decrease the rate of growth in government spending back to 18 percent of GDP. Simplify the tax code - I prefer the flat tax.

Yes, it is a teachable moment, but it is lost on a president who would rather transform the economy than fix it, and all of us as a result will suffer the consequences.