Update: Bush says he can find “common ground” with Democrats on an economic stimulus. “Common ground” = Watch your wallets.
Update: Bush will meet with members of Congress at 2:40pm Eastern today. USAT reports that the White House is “not ruling out a stimulus package in excess of $150 billion.”
U.S. stock futures seesawed Tuesday after the Federal Reserve, responding to a growing financial market crisis, slashed interest rates 0.75 percentage point. Dow Jones industrial futures, down more than 500 points, or more than 5%, before the Fed move, were fluctuating violently an hour before the start of trading, but improved to a level where they were down 206, or 1.7%, to 11,900. The Fed move was unsurprising, given that world stock markets were falling precipitously the past two days, and that U.S. stocks had tumbled last week amid growing fears of a recession in the United States. Still, the markets are quite anxious, not sure that even interest rate cuts will lift an economy slammed by an ongoing housing and credit crisis. The Fed’s move came a week before the central bank’s regularly scheduled meeting, a sign that the Fed recognized the seriousness of the world financial situation.
This much is clear: All the grand talk of a multi-billion-dollar “economic stimulus” from self-appointed saviors in both parties is not helping. It hasn’t persuaded reality-based observers here and it hasn’t persuaded markets abroad. Sorry, Hillary, but your five year interest rate freeze and your “Green Collar” jobs initiative ain’t gonna rescue America. Alan Reynolds provides more reality checks to President Bush in the WSJ today–elaborating on points I’ve made here (and many of you have made here in comments and e-mails) over the last several months:
A reporter on Fox News recently asked, “Which presidential candidate is most qualified to turn the economy around and avoid a recession?” The quick answer is: none.
No candidate will become president soon enough to matter, and to ask the question is to presume that recessions can and should be avoided. But some business mistakes require time to be fixed. Too many houses were built in some areas, so prices have to fall to discourage more building and encourage more buying. Some banks made too many bad loans, so they need to become more cautious. Besides, if presidents really knew how to avoid recessions, why do we keep having them?
Nonetheless, President George W. Bush is now joining the election-year rush to “give the economy a shot in the arm.” A shot of debt, that is.
All proposals for fiscal stimulus claim to “jump-start” the economy by having the government borrow money from Smith and give it to Jones. Unfortunately, Smith is paid interest on that IOU, which implies a higher tax burden on somebody. That future taxpayer is, as usual, the forgotten man. All the attention is instead focused on Jones — trying to get the Jones family to spend more on what Mr. Bush alluded to as “basic necessities.”
As for the drive in Washington to encourage people in debt to spend, spend, spend more, Reynolds debunks the gimmickry:
Mr. Bush put great emphasis on boosting consumer and business spending “this year.” Any such temporary boost is likely to shift the timing of such purchases forward — at the expense of next year.
Economists use the phrase “political business cycle” to describe the abuse of opportunistic fiscal gimmicks (usually transfer payments) to provide a temporary boost during presidential election years. The hangover is felt during the year after presidential elections. Recessions thus began in October 1949, July 1953, August 1957, December 1969, November 1973, July 1981, and March 2001.
Alan Auerbach of the University of California at Berkeley surveyed the effectiveness of U.S. fiscal policy in 2002, concluding that “discretionary policy has had a weak overall effect on output” and that there is “little evidence these effects have provided a significant contribution to economic stabilization, if in fact they have worked in the right direction at all.”
That conclusion became slightly more controversial after the 2001 tax rebate, which turned out to be well-timed as a matter of luck. But the 2001 rebate, unlike today’s proposals, was not temporary. It was an advance on tax refunds resulting from the reduction of the lowest tax rate to 10% from 15% on the first few thousand of taxable income — a reduction which still cuts every taxpaying couple’s tax bill by $600. We can’t conclude that temporary rebates will “work” (temporarily boost sales of consumer staples) on the basis of evidence from a tax cut that was not temporary. And we can’t conclude that rebates confined to those with modest incomes will work on the basis of a tax cut that was granted equally to every taxpayer — including the top 20% who account for 40% of total consumption.
Alas, lack of evidence of their efficacy has never stopped politicians from foisting bad ideas on the nation before.
At 10am this morning, the Senate Finance Committee holds a hearing titled “Strengthening America’s Economy: Stimulus That Makes Sense.” CBO director Peter Orszag is scheduled to testify.
The Examiner editorializes against boondoggle stimulus fairy tales:
If somebody grabbed your wallet and then handed you back a $20 bill, would you be grateful? Realizing the money was yours to begin with, you would probably call the cops rather than thank the thief.
President Bush’s latest gimmick to stimulate the economy by giving back to taxpayers $800 of their own money is the Washington equivalent of the “generous” thief. The biggest fairy tale in Washington isn’t Barack Obama’s voting record on the war in Iraq, but the notion peddled by Republicans and Democrats alike that the government has a big pot of its own money that it generously gives to people by “injecting” it into the economy as a stimulus.
In fact, government has only our money or money it borrows from lenders. The problem is it costs the government a major portion of every dollar it takes from us in collecting it and paying the interest on dollars it borrows. Why not just let us keep our money in the first place?
…For a real economic stimulus, look no further than the Bush 2003 tax cuts, which lowered the tax rate on capital gains and offered businesses other incentives to invest and hire more workers. Derided in the media as a “tax cut for the rich,” the 2003 tax cuts’ positive results were felt throughout the U.S. economy…
…The proper response to a major economic slowdown is to slash government spending and make those tax cuts permanent. That will keep far more money circulating in the productive sectors of the economy and reward savings and investment, the two pillars of new job creation.
Then, as economic growth regains vigor, politicians should stay out of the way as the market makes painful but necessary corrections that reward the prudent and punish the profligate, including those responsible for the subprime mortgage meltdown.
More on stimulus stupidity from Chris Edwards in the NYPost:
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.
Ed Morrissey spotlights an argument from Suck It Up analysts that I agree with:
This crisis started with a credit meltdown that came from poor loan decisions made when credit was cheap. Rather than lowering the price of credit as the Fed dramatically did here, analysts have argued that tightening credit and liquidity would be the better long-term strategy to resolve the actual problem, rather than addressing the symptoms.
That kind of strategy would force the country — and the globe — to suffer a recession as a corrective. That might be an effective economic strategy, but not a political strategy. In an election year, no one in either party wants to explain why they think a recession would be good for the soul.
Yes, God forbid politicians advocate that borrowers and lenders face the consequences of their actions…