Too Much Stimulation

Bush and Congress should leave the economy alone

"America is successful because of the hard work, and creativity, and enterprise of the people," President George W. Bush told the nation on September 20. "These were the strengths of our economy before September 1lth, and they are our strengths today."

Bush should have reread his speech before agreeing last week to an economic stimulus package of up to $75 billion. He may have noticed that his list of strengths didn't include the skill of government managers.

There are many reasons to oppose a federal economic stimulus package, even if one agrees with some of the particular policies. For one, the task is impossible. "Experts" often talk in confident tones, so as to give the impression that understand the economy. Understanding the economy, after all, is necessary if they are to manage it, massage it, or stimulate it. Yet outside of a few truisms—such as, all things being equal, if the price of something drops, people will buy more of it—they don't understand much of anything about how the macro economy actually works.

This ignorance is combined with huge timing uncertainties. Fiscal stimulus—government spending meant to increase the demand of goods and services from the private sector—is famous for kicking in at just the wrong time. Nothing like an inflationary jolt of make-work government spending to arrive just as the self-corrected economy is functioning close to capacity.

Even if someone understood the economy well enough to manage it, our political process would mess it up. Consider the advice Bush and Congress are getting at present. Democrats and their economic advisors are insisting that any stimulus package be temporary. A rebate to low-income workers through the payroll tax is a favorite. Yet we know from experience that temporary fiscal stimulus isn't very effective. People save financial windfalls, especially in uncertain times. That's why, by the best accounting, taxpayers planned to spend a mere 18 percent of this year's tax rebates on consumption goods.

The Republicans propose tax cuts for capital gains and corporate income, plus changes to the tax code that would make life more profitable for business. Some of this may be good economic policy, just as Democratic proposals to hand people money may be considered good social policy. But it won't do much for short-term economic stimulus. Who, among investors, can't find a capital loss to offset a capital gain this year?

Ultimately, stimulus packages simply become means for politicians and interest groups to achieve their predetermined and self-serving ends. Sen. Frank Murkowski (R-Alaska) thinks that a gas pipeline from Alaska to Chicago would provide a much-needed stimulus to the economy. Sen. Blanche Lincoln (D-Ark.) wants the government to assist the technology sector by purchasing computers—an information-age version of the "dig holes in order to fill them" thinking of the 1930s.

Prior to September 11, Bush and Congress had set a generally sensible macroeconomic policy framework for the next decade, one that included a tax cut, debt repayment, and modest growth in government spending. Since the attack, government spending has jumped. Debt reduction is no longer the short-term agenda. In terms of fiscal stimulus, the U.S. economy already has the $40 billion promised for responding to the attack and the $15 billion for aid to dependent airline executives and investors. In addition, there's the $38 billion in tax refunds. And although it's hardly been noted, Congress has kicked up discretionary spending by $25 billion over what Bush originally requested.

That's just the spending side. On the monetary side, a tool I consider overrated, Federal Reserved Board Chairman Alan Greenspan has cut the target for the fed funds rate from 6.5 percent to 2.5 percent just this year. Nobel Laureate economist Milton Friedman, an opponent of the stimulus package, noted in yesterday's Wall Street Journal that by one measure the money supply has increased by 10 percent this year. At some point, this promises to produce inflation, which may be one reason why interest rates don't seem to be responding to the Fed's coaxing.

There's plenty of economic stimulus in the pipeline, even without the feds building a pipeline for an Alaskan senator. There's also plenty to keep our federal government busy. The unfinished domestic agenda includes the education bill, which is sure to include stimulus for the education establishment, and the Patients' Bill of Rights, which will allow the government to hire some more regulators. There are the issues of bailing out the airlines and expanding into the airport security and reinsurance businesses. There's the push for homeland security, which might threaten cherished liberties. Finally, there's that little project of wiping out terrorism. Considering that "to do" list, one might think the politicians would be happy to leave the economy on automatic pilot.