The Washington
Times www.washingtontimes.com
Stimulating nonsenseLlewellyn H. Rockwell Jr. Published February 4, 2003
Imagine a physician doing invasive
surgery to correct a disease about which he knows only the symptoms but is
clueless about the cause or the
solution. This is a metaphor for the long
history of Keynesian countercyclical fiscal policy, the economic model now
being employed by the Congress and the White
House. Everyone is at work on a "stimulus
plan" for doing something about the recession. The much-publicized
disagreement between the Republicans and Democrats is not about economic
theory as such. There has been no critical thinking applied to the subject
of why the recession, the longest in the postwar period, continues.
Rather, the disagreement is about which levers to pull when, and who
should get the benefits. The underlying
idea in the Keynesian tradition is to attribute the length of the
recession to insufficient effective demand, so it is up to government to
give the economy a kick-start, change public psychology, spend money on
anything and everything, stop the money hoarding and start the buying,
inflate a bit here and there, drive down interest rates, run deficits for
a while, and fool the workers into thinking they're getting raises though
their real wages are falling. That's the
traditional mix of policies employed during every recession between the
early 1930s and the current day. The only difference in the current
recession is that the main concern is the stock market. Moreover, the
recession is not marked by notably high unemployment. There's only one
problem: There is no evidence this path has ever worked to pull an economy
out of recession. While any non-socialist
should cheer a tax cut — though if government spends money, it has to come
from somewhere — let's not pretend the Bush administration is driven by
the desire to free the economy from the taxman's shackles. If every dime
saved by taxpayers were put into savings accounts, the administration
would consider its plan a failure. The idea is to get people to spend the
money. This is the type of Keynesian policy Republicans like because it
dovetails nicely with Republican slogans about small
government. The idea of eliminating taxes
on dividends in particular is designed to boost demand for the stocks that
pay them (typically older companies with more political connections). And
where is the money that will flow to stocks coming from? Most likely from
investments that currently yield interest payments — at least that's the
theory. If the purpose were merely to boost the business sector and
eliminate double taxation, that could be accomplished by a reduction of
corporate taxes, an idea that was ruled out early
on. Another idea that made a brief
appearance in late December was to create a payroll tax holiday. The
Democrats favored this idea because it would benefit their constituents,
but the Republicans rejected it out of hand, proving once again they have
no general interest in making government cheaper for average Americans.
The idea was quickly dropped when everyone realized the dangers associated
with creating a precedent that would allow people not to pay a tax. After
all, if a tax holiday is good for the economy, why not make it
permanent? But will draining savings and
boosting spending cure what ails us? No, because the U.S. economy is, in
fact, not suffering from some blight of insufficient aggregate demand. It
is suffering from the malinvestments of the previous boom, when the
capital-goods sector expanded disproportionately to what savings could
justify, an imbalance brought about by the Federal Reserve's loose money
policies of the late nineties. But you
won't read about this in the literature of the Keynesians who still rule
the roost in Washington. For further proof, look at the headlong rush to
extend unemployment benefits on into the future. This is completely
contrary to what economic reality should dictate. In a recession with
unemployment, wages need to fall in real terms. But an ironclad tenet of
Keynesian economics is that this must never be allowed to happen. By this
one error, the Great Depression in the U.S. and Britain was prolonged by
many years. There are several undeniable
realities of a recessionary environment. Wages tend to fall. Businesses
tend to be liquidated. Resources are withdrawn from investment and put
into savings. Consumers spend less. Stock prices
fall. All these tendencies may seem
regrettable, but they are necessary to bring all sectors back into
realistic balance with each other. It can only do harm to fight these
developments, as Japan has done for 10 years and Washington is doing again
today. Even if the first stimulus held
out the prospect for success, Washington has worked for 18 months to
cripple economic growth through mind-boggling spending, aggressive
protectionism, and attacks on the personal liberty that undergirds free
enterprise. The prospect of war and all it entails is the Sword of
Damocles threatening American prosperity. All this drains power and
resources from the private to the public sector, the last thing an economy
in recession needs. Might the economy be
in recovery mode had Washington not engaged in these destructive acts?
Perhaps. It is a general rule of public policy that when government acts
to fix a problem, it makes the targeted problem worse and creates a few
more in the process. By all means cut
taxes. Anytime, anywhere. But one must also cut spending if the goal is to
reduce the overall burden of government (and that is clearly not the
goal). One must also be prepared for the possibility citizens will save
this money, as they probably should, rather than spend it. In the current
D.C. hysteria, however, it is Keynesianism and not clear economic
thinking, that
rules. Llewellyn
H. Rockwell Jr. is president of the Mises Institute in Auburn, Ala., and
editor of LewRockwell.com.
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