Talk of economic stimulus plans is afoot in Washington, but almost every idea being floated is wrongheaded, and tragic.
The central idea seems to be to “put money in people’s pockets” so that they can “spend it”—WRONG. The thought is that the economy needs some sort of short-term boost in demand (spending), and that the best way to do that is to borrow from the future and put some modest amount of money in the hands of middle-class and lower-income families through an immediate tax rebate so that they can go right out and spend it, thus rescuing Wall Street and the world economy—WRONG.
Upper income workers would not receive the tax rebate, because upper income workers tend to save and invest, rather than spend. And, of course, we need people to spend the money rather than save and invest it—WRONG. And, certainly, the changes need to be “temporary,” since our status quo economic policies are already ideal—WRONG.
The truth is, our existing tax policies are not ideal, and our economy has been lagging its potential growth rate for a long time. As Alan Reynolds writes in today’s Wall Street Journal, there is very little evidence that government attempts to stimulate the economy have ever worked at all, or even if they have worked in the right direction. Indeed, as Reynolds writes, “with luck, the end result may be merely wasteful and ineffective.”
The tragedy is that, just a few years after celebrating the lives of Ronald Reagan and Milton Friedman, we seem to have forgotten everything they tried to teach us. Ronald Reagan jump-started the economy into a multi-year expansion by cutting taxes and making it more attractive for businesses and individuals to save and invest.