Wednesday, December 8, 2010

Ill-Conceived Stimulus Threatens to Gum Up Recovery

Government Revenue Growth Surpasses Spending

- by: Larry Walker, Jr. -

Here we go again. At a time when government revenues are actually growing faster than spending, in step the clueless to gum it all up again. Sure, we still have a spending problem, but the cure is not more of the disease. Lawmakers always attempt to solve what they perceive to be a problem, well after self-correction has begun, and in all their ill-conceived efforts always manage to muck things up. In the present lame-duck session, all that the people asked is for tax rates to remain constant. That’s all we requested, and that’s all that’s needed at this moment in time. But instead, politicians are still playing around with the failed stimulus ideal, a policy which has never worked in American history. The truth is that with tax rates at present levels, revenues have already begun to surpass spending on a percentage basis. Government revenues have been growing faster than spending since the 2nd quarter of 2009.

The following chart, courtesy of the Bureau of Economic Analysis shows that government revenues are currently growing at a faster rate than spending (click to enlarge).

Government Spending and Revenues (% Change)

The chart below (click to enlarge) shows the discrepancy between revenues and spending in dollars. Clearly what’s needed is for spending to decline while revenues remain constant.

Government Spending and Revenues ($ Change)

In my piece entitled, “Untimely and Proven to Fail”, the myth behind government stimulus programs was clearly exposed. During the most recent recession, at the end of 2007, economists recommended stimulus spending as a means of averting a full blown recession. In order to work successfully, such a stimulus needed to be large enough; timely, targeted, and temporary. Although such a plan was implemented, by the time tax refunds began to reach taxpayers, in April of 2008, economists declared that it was too late, and that recession was then unavoidable. In February of 2009 a second stimulus was enacted, well after the recession had begun, and nearly at the time it was over. What was the point? The only purpose of an economic stimulus program, although one has never actually worked, is to avoid a recession. Once a recession has commenced, an entirely different set of policies is required.

What is called for in our present crisis is both a reduction in government spending, and stability in tax rates. Although reductions in income tax rates worked in the 1960’s, 1980’s and 2000’s, the present administration did not appear to actually want to improve the economy when it had the chance. Instead, progressives have been fixated on gumming things up in order to achieve what they claim are more noble goals. What lawmakers have proposed in lieu of a common sense compromise is more temporary stimulus. Where government errs is that businesses don’t respond to temporary policies. We are focused on the long-term. If we could see a coherent tax plan, one in which tax rates remain stable for some period and then eventually decline, there would be stability and growth. The Bush tax cuts were gradual in nature and, like Reagan’s plan, culminated in the lowest rates at the end, while the current administration is still playing around with temporary policies which lead to an uncertain end. Taxpayers can only suspect that in the end, we’ll all get screwed.

In an August 2004 article of the Journal of Political Economy, two UCLA economists said they figured out why the Great Depression dragged on for almost 15 years, and they blamed a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt. After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian concluded that the New Deal policies signed into law 77 years ago thwarted economic recovery for seven long years. Ohanian and Cole blamed specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

In conclusion, while policymakers should be focused on a plan which will reduce spending, and remove uncertainty, as the Fiscal Commission has already spelled out; instead what we are being served is another $700 to $900 billion stimulus program, this time three years after the fact. A lame-duck session is not a good time to consider a long-term strategy. All that we asked for was that tax rates remain stable until a solid plan may be implemented next year. We did not request another economic stimulus, but rather a stay, in order to remove the present cloud of unusual uncertainty. Will we ever have a government who gets it? I would rather see the current proposal fail and have tax rates rise for the first couple of weeks in 2011, than be herded into more bad policy by a bunch of incompetent lame ducks. Isn't this why they lost in the first place?

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