Out of Control Policy Blog

A stimulus package? Please, just stop the madness

Fed Chairman Ben Bernanke wants a new federal stimulus package to help "jump start" the economy. (Pardon me while I take a moment to wrap my head in duck tape before it explodes). House Speaker Nancy Pelosi alluded to this idea during speeches for the now enacted Emergency Economic Stabilization Act bailout. And given the Bush Administration's propensity to approve stimulus packages, it is likely we might get another redistribution of wealth move before the year is over. The infuriating thing about this is that there is a different answer than just straight "stimulus package" and bailouts that can help us, but no one on the Hill is willing to listen.

Stimulus packages only "spread the wealth around," to borrow the Obama line‚Äďand this is a bad thing. To spread that means you have to take from those who have and give to those who don't. When anyone else does this, we call it stealing. When the government does it, we call it a "stimulus" package. And in principle it hurts us more than it helps.

Instead of giving people money, especially people who didn't have money in the first place, how about the government just not take money from people? Yes, that might be a difficult thought to comprehend for the government, but think about it...

The more money "the wealthy" have the more money they have to invest. The more investment there is in the economy, the faster it will grow, the faster our economy will be back on track, more businesses will be created, which will create more jobs, and lead to innovation, and better companies, etc, etc, etc, the free market mantra goes.

But when you take from "the wealthy" and give to the poor they just consume. Now, consumption is a good thing, a vital thing, but extra cash won't increase consumer confidence. People are more likely to save the money for a rainy day.

The scary thing is that Congress, Bernanke and the Treasury Department know this, so we're likely to get something much worse than the $300 to $600 checks they handed out this summer (note how well that worked out). If the goal is to pass a "job-creating" package and to restore "investor confidence" (Nancy Pelosi's words) though free money then we might see massive checks handed out to individuals and businesses in the coming months. (Yep, there it went, my head just exploded, thankfully this duck tape is holding all the pieces together).

The truly painful thing is that Congress cannot see it has the perfect tools for doing exactly what it wants to do at hand, but doesn't trust those tools. And those tools are... drum roll please... tax CUTS. Here's how it would work:

Lets say the goal of Congress is to stimulate job creation. What do companies need to hire more people? Money and product. Jobs are more than just the cash to pay employees; people need something to do. It would take large sums of cash to help firms hire new employees and expand production. Instead, if you cut taxes for small businesses, trim down the capital gain taxes, and create tax holidays for capital investment you incentivize production. Firms can now produce and sell at a lower cost, which means they can drop the price of their product, which in turn can translate into creased demand, and higher net revenues. With those higher net revenues firms can hire new employees to handle their increased production. And all of that comes without a cent of taxpayer money funding the project.

Ok, sure, that might work you say, but what about "confidence" in the market? First, tax cuts for businesses and the potential for more jobs should increase general confidence in the economy, but we can do much more. Giving out cash means the government is either increasing its debt or using revenues that could have been used to pay down the debt. Either way a stimulus package, properly perceived, should actually shake confidence in the market because it means our nation is in a more precarious fiscal position. Instead, if we allow money to be repatriated into the market tax free and create a tax holiday for all ROI (returns on investment) for money invested in the market between now and December 31, we will see a large amount of the capital sitting off the market, put back in. The only way the stock market goes down is if people sell their shares, which means people are liquidating their money, which means a lot of that "lost wealth" from the stock crash is sitting in checking and savings accounts across the country. Banks have money to loan too, they just don't want to because they aren't sure they'll get it back or have enough capital to cover themselves on another stock drop. There is money out there, we just need the right conditions to get people to reinvest. Tax cuts can instill confidence; stimulus packages only increase our woes.

Ironically, this move by Bernanke is coming from a Republican appointed financial leadership team. It is liberal economic policy, Keynesian if you will. And its exactly what an Obama Administration would push for (perhaps even a McCain Administration). But if that's the case, then the Democrats need to change their slogans, because they don't represent much change from the status quo.

Bernanke said to the House Budget Committee today, "With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate."

In response, Pelosi issued a statement of approval: "Chairman Bernanke added his voice to the chorus of economists, experts and policymakers who insist that America needs a job-creating recovery package to get our economy back on track and to restore consumer and investor confidence."

If this is where the Democrats and Bush Administration stand, then to borrow the DNC catch phrase, Obama isn't change; he's just more of the same. The same could be said of McCain who has voted for the bailout and is pushing another one.

Obama is right about one thing: we need a real change. Unfortunately, for all their bickering, most leading politicians seem to be headed in the same direction, not giving us the change we need.

Anthony Randazzo is Director of Economic Research


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