RSS Feed Menu“It is common sense to take a method and try it. If it fails, admit it frankly and try another.” So spoke Franklin Roosevelt, describing his approach to tackling the Great Depression. For the present financial crisis, Democrats have a different mantra: When a method doesn’t work, they propose to simply go ahead and try it again.
How else to explain the idea of a second economic stimulus package, which is gaining some traction in Washington right now? Recall the estimate by White House economists Christina Romer and Jared Bernstein that the stimulus package passed earlier this year would prevent the unemployment rate from going any higher than 8%. The unemployment rate is now at 9.8% and expected to continue rising.
Democrats would have us believe this means they underestimated the severity of the financial crisis. Speaking in July of this year, Vice-President Biden stated that there was “a misreading of just how bad an economy we inherited.” He more or less repeated those same words later that month, stating in an interview that “we misread how bad the economy was” when he and President Obama took office and advocated the stimulus bill.
This seems unlikely. President Obama, after all, argued in October 2008 and again in February 2009 that the United States was in “the worst financial crisis since the Great Depression.” Also in February, in a press conference urging Congress to take action on a stimulus bill, President Obama stated that a failure to act immediately “could turn a crisis into a catastrophe.” If the administration and other Democrats underestimated the financial crisis, then, President Obama’s public pronouncements over the last twelve months certainly suggest otherwise.
The far more reasonable conclusion is that the stimulus was a flawed remedy. To recap its most salient features: The stimulus provided for $787 billion in deficit spending. Injecting this money into the U.S. economy was supposed to stimulate economic activity, at a time when the private sector was ailing and consumers were reluctant to spend money.
But the stimulus bill was ill-designed. Seeing an opportunity to advance a number of causes that are favored by left-leaning members of Congress, Democrats turned the stimulus bill into a highly politicized spending bonanza. Billions upon billions of dollars were earmarked for Democratic favorites like global warming research, the National Endowment for the Arts, Amtrak, purchasing hybrid vehicles for federal agencies, and other non-stimulative expenditures.
The real problem with the stimulus bill, however, is more fundamental. By spending substantial amounts of money at a time when the national deficit had already reached astronomical levels, the federal government triggered a well-founded fear that tax hikes and inflation lurk just around the corner.
Why? The federal government will at some point — sooner rather than later — have to pay off its ever-increasing debt. One way to do so is to cut down on federal spending, but that seems unlikely — especially under this administration. The other two ways are for the Federal Reserve to print money, which increases prices — in other words, inflation; or to raise government revenues, which means raising taxes in some form.
The mere expectation of inflation and tax hikes deters investment and stifles economic growth. Looming inflation creates an atmosphere of uncertainty around price-levels and thus purchasing power, making it very difficult for businesses to decide whether to make capital expenditures or hire more workers. It also deters individuals from saving or investing their money, both necessary preconditions for a true economic recovery.
The prospect of tax hikes, meanwhile—and the corresponding anticipation of tighter budgets—causes businesses and individuals to severely restrict their spending. The result is even greater reluctance on the part of businesses to hire more workers, for example, or to open a new branch, or to invest in a new technology. At the same time, consumers become less likely to spend money, which leads to a decline in business revenue.
Democrats need to realize that the best way to recover the U.S. economy is to create a climate that favors investment and growth. They must address concerns about the potential for rising taxes and inflation — which means reducing the federal deficit, not adding to it with more stimulus spending.
SFTor1 // Oct 16, 2009 at 6:28 pm
Hello Alexander:
I will be charitable and assume that you want to see a new stimulus package that maximizes local hiring. That would entail more infrastructure projects and other kinds of public works, incentives for green industries, and so on.
I am confident that you are not suggesting less regulation and lower taxes. You couldn’t.
LFC // Oct 16, 2009 at 6:33 pm
Democrats have a different mantra: When a method doesn’t work, they propose to simply go ahead and try it again.
Maybe you should be addressing the Republicans who are calling for more tax cuts and more deregulation. Project much?
How else to explain the idea of a second economic stimulus package, which is gaining some traction in Washington right now?
By looking at total GDP growth last quarter, measuring the amount represented by add’l gov’t spending, and asking if the economy is able to stand on its own. The answer last quarter was a resounding “NO!” The only thing that kept the economy from spiraling downward was additional gov’t spending. And it still looks too shaky to stand on its own.
The stimulus provided for $787 billion in deficit spending. Injecting this money into the U.S. economy was supposed to stimulate economic activity, at a time when the private sector was ailing and consumers were reluctant to spend money.
And it did. It was measured. See above.
One way to do so is to cut down on federal spending, but that seems unlikely — especially under this administration.
“Especially under this administration?” REALLY? Dude, you just jumped feet first into Lake No Credibility.
The GOP under Reagan, George HW, and George W (who owns the current $1+ trillion hole he left us with) has run deficits so long and so hard that tax hikes are now unavoidable. The GOP loves to preach about cutting spending, but they have zero track record on the issue. Military? Can’t touch it. In fact, it has to be increased even more. Medicare? We were just told it can’t be touched. They added a huge RX benefit, with zero discussion on how to pay for it. Social Security? They wanted to privatize it, creating a huge increased cost to the gov’t, and then they refused to even discuss how it would be paid for. We know we can’t default on our debt, so that leaves only discretionary spending, which is dwarfed by what I just listed.
When the Republicans tell me specifically how they will balance the budget with spending cuts, I’ll listen, but all I’ve heard is that tax cuts pay for themselves. And they won’t cut anything of significance.
BTW, Republicans love to talk up Reagan’s tax cuts, but he also presided over massive spending increases. If it was OK for Reagan to stimulate the economy out of a recession with deficit spending (which he never pulled back on), why is it so wrong now?
The mere expectation of inflation and tax hikes deters investment and stifles economic growth.
Like under Clinton.
The prospect of tax hikes, meanwhile—and the corresponding anticipation of tighter budgets—causes businesses and individuals to severely restrict their spending.
Are you joking? If a business spends more, it has LESS TAXABLE INCOME! They’re called EXPENSES, and they reduce taxable profits. If you don’t understand that, you have no business writing on this topic.
Individuals are afraid of tax hikes? I call BULLS***! Individuals are afraid of losing their freaking jobs. If you don’t understand that, you have no business writing on this topic. And you need to get out more.
Democrats need to realize that the best way to recover the U.S. economy is to create a climate that favors investment and growth. They must address concerns about the potential for rising taxes and inflation — which means reducing the federal deficit, not adding to it with more stimulus spending.
Uh, “create a climate”, “address concerns about the potential”? How nice and fluffy. How about proposing something remotely concrete. And address both the spending side (with specifics) and the revenue side (which has plummeted).
Bruce Bartlett is right. There is no way to seriously reduce the deficit without raising taxes.
sinz54 // Oct 16, 2009 at 7:32 pm
Bottom line: No additional stimulus is needed. None.
The unemployment rate, as Obama himself noted, is a lagging indicator of economic health. Ignore it–it’s like driving down the highway by looking in the rear-view mirror. Other more prescient indicators, like the stock market, are suggesting an economic recovery. Retail sales are up. Earnings are rising.
And the dollar is weak enough already without spending it into toilet paper.
The Dems shouldn’t be allowed to get away with buying votes with Federal largesse.