Stimulus Package Nonsense

By Walter E. Williams

Some Democratic and Republican presidential hopefuls are preaching economic doom and gloom, disappearing middle class, and failing health care industry. What’s their solution? The short answer is give them more control over our lives. Baltimore’s political satirist, the late H.L. Mencken, explained this strategy, saying, “The whole aim of practical politics is to keep the populace alarmed, and hence clamorous to be led to safety, by menacing it with an endless series of hobgoblins, all of them imaginary.”

The imaginary hobgoblin this time is the threat of an oncoming recession, even though it is by no means clear that the U.S. economy is in a recession. To head off a recession, politicians, including President Bush, are calling for a stimulus package.

U.S.President George W. Bush (R) and Treasury Secretary Henry Paulson make a statement on an economic stimulus package agreed to by lawmakers on Capitol Hill at the White House in Washington January 24, 2008. REUTERS/Jim Young (UNITED STATES)

Before we talk about stimulus packages, let’s get one question out of the way: Is there any evidence for the existence of a Santa Claus or Tooth Fairy? Most grown-ups would probably answer no and ask, “Williams, this is a serious issue. Why are you talking about silly things like Santas and Tooth Fairies?” The reason is quite simple. Let’s look at it.

The White House proposal is to give individuals and households tax rebates ranging from $800 to $1,600 respectively. Congressional Democrats, in addition to tax rebates, want a stimulus package that targets the poor through increases in food stamps and greater unemployment benefits. The details of different stimulus packages aren’t as important as where the money is coming from. You can bet the rent money it won’t come from Santa or the Tooth Fairy.

There are three ways government can get the money for a stimulus package. It can tax, borrow or inflate the currency by printing money. If government taxes to hand out money, one person is stimulated at the expense of another who pays the tax, who is unstimulated and has less money to spend. If government borrows the money, it’s the same story. This time the unstimulated person is the lender who has less money to spend. If government prints money, creditors, and then everyone else, are unstimulated. As my colleague Russell Roberts said in a NPR broadcast, “It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing — the water in the shallow end doesn’t get any deeper.”

If we are headed into a recession, these proposed stimulus packages will make little difference. Previous experiences have shown that (1) it takes a long time to enact tax law, making it too late to prevent a recession, and (2) many people save a large portion of any tax rebate. A far more important measure that Congress can take towards a healthy economy is to insure that the 2003 tax cuts don’t expire in 2010 as scheduled. If not, there are 15 separate taxes scheduled to rise in 2010, costing Americans $200 billion a year in increased taxes. Adding to the economic effects of that tax increase are the disincentive effects of the measures that Americans will take between now and then in anticipation of those tax increases. According to economists Tracy Foertsch and Ralph Rector, making the 2003 tax cuts permanent will annually add $76 billion to the GDP, create 709,000 jobs and add $200 billion to personal income.

The call for stimulus packages represents the triumph of political arrogance over common sense. The U.S. is a massive $14 trillion economy. The size of proposed stimulus packages range from $150 to $200 billion, which is about 1 to 2 percent of our GDP. Economy-wide, that’s a drop in the bucket likely to have little or no effect. Congress ought to focus on measures that create greater long-term productive incentives such as reducing corporate taxes, estate taxes and personal income taxes as well as economic deregulation.

It’s the Dollar, Stupid (and Taxes, Too)

Steve Forbes

Uh-oh. Washington wants a stimulus package to rejuvenate our slowing economy. Usually such programs are full of nice-sounding but wasteful spending initiatives, as well as tax breaks that have a weak, one-shot impact on the economy. President Bush should therefore offer a deal: strong, pro-growth measures as the price for signing off on the usual unproductive stuff. But the White House has panicked and will go for things that won’t solve the problems plaguing us. The President should recover his nerve and verve. Otherwise, he will blast away a positive economic legacy.

The most potent, constructive medicine would be for the Bush Administration to stop its Jimmy Carter-like weakening of the dollar. A feeble dollar means inflation–witness what’s happened to commodity prices over the last four years, the most prominent being oil, which has almost quadrupled in price. This ain’t a case of supply and demand. Four years ago an ounce of gold would buy you roughly 12 barrels of oil; an ounce today would get you roughly 10 barrels–that’s hardly a 300% real price increase. A weak dollar also brings about economic distortions, such as the (now disastrous) subprime mortgage orgy. President Bush should announce that we will defend the dollar and make it stronger. The Fed should announce that it will let the federal funds interest rate float, at the same time removing some of the excess money it created in 2004–05.

The bottom line: No strong economy has a weak currency.

An additional and powerful shot in the arm would be to make permanent–and, indeed, deepen–the tax cuts on dividends and interest that expire in 2010. Reduce the levy on dividends and capital gains from 15% to 10% and you’d see a sharp boost in equity markets, as well as in consumer and business confidence. Business capital outlays would boom, as would entrepreneurial startups.

Former Bush economic adviser Larry Lindsey recently came up with a good idea in the Wall Street Journal to unclog the tightening credit arteries: Allow manufacturers and retailers to open up their own in-house banks or financial institutions that could borrow and lend money. These entities could make loans to customers that now frightened banks are increasingly loath to make. Unfortunately, approval for this type of entity has been paralyzed by the fight over Wal-Mart (nyse: WMT news people )’s attempt to open such a bank. Unions and banks opposed it, and the proposal has languished.

Congressional Democrats instinctively oppose things that actually facilitate progress. They’ll howl that all of these proposals are a giveaway to the rich. So in exchange for the good stuff, give them some of their pet projects in return; for example, one-time rebates of the kind George Bush issued in 2001 and Gerald Ford in 1975.

The Donkey Party will want some other programs, such as temporary aid to states for housing assistance. These things are well worth the price for the short- and long-term power of tax-rate reduction, sound currency and unclogged credit arteries.

Pernicious Pretension

Why is there an almost universal dogma that governments can play significantly positive roles in economic activity, that they can fine-tune economic activity and prevent excesses and cushion downturns?

It’s a colossal conceit, and one that does immeasurable harm. Economies are not like engines that can be mechanically manipulated to run better. To hear all the chatter about tax rebates, for example, you’d think they were the equivalent of recharging your car’s dead battery.

In fact, it’s usually government actions that cause destructive economic troubles and excesses. The Great Depression, for instance, is always cited as prima facie proof as to why we need active government involvement. To the contrary, government blundering brought on the disaster, starting with the Smoot-Hawley Tariff of 1929–30, which began a devastating trade war that, in turn, dried up international trade and flows of global capital. That horrible error was compounded in the U.S. by Herbert Hoover’s massive tax increase to balance the budget in 1932. Hoover thought a balanced budget would revive confidence. Instead, the deficit ballooned, as the high taxes deepened the slump. Compounding Hoover’s errors, Franklin Roosevelt retarded recovery through major tax increases and destructive regulatory meddling. For the first and only time in our history a recovery didn’t surpass the peak of the previous economic expansion.

The horrific inflation that racked the U.S. and most of the world in the 1970s and early 1980s was clearly the result of excess money creation by the Federal Reserve, abetted by other central banks. President Richard Nixon cut the U.S. dollar from gold in 1971, and central banks floundered.

Today the weak dollar is roiling financial markets and hurting our economy.

As for the cures for economic contractions, government spending isn’t one of them. Franklin Roosevelt repeatedly “primed the pump” with government spending and job-creation programs in the 1930s–to little avail.

Japan repeatedly enacted stimulus packages during its 15-year quasi-recession, from the late 1980s to the early part of the new millennium–futilely.

If government spending was the way to wealth, the Soviet Union would have won the Cold War.

What governments can do is create environments in which entrepreneurial activity can flourish–a sane legal system with property rights, low taxes, sound money and minimal barriers to doing business. But rebates and “emergency” spending measures, or the Fed playing with interest rates to encourage or discourage economic activity? Bah, humbug.

Reagan Would Applaud

Rudy Giuliani unveiled a tax cut/tax simplification proposal recently that is the most sweeping and exciting since the days of Ronald Reagan. The personal income tax rate would be cut sig- nificantly. The corporate tax rate would be whacked from 35% to 25%, and the capital gains levy would be reduced by a third to 10%. Capital gains would also be indexed for inflation–no more paying taxes on phony gains. There would be tax-free savings vehicles for individuals; the Alternative Minimum Tax would be indexed for inflation and ultimately eliminated; and the death tax would be buried once and for all. An eye-opening feature is Giuliani’s one-page income tax form. If you wished, you could literally fill out your income tax return in less than 20 minutes.

While not a pure flat tax, this is an enormous step in that direction.

Giuliani recognizes that our tax on business profits is now the second highest in the developed world and that encouraging risk taking by reducing the capital gains tax burden will quicken innovation. He also knows that tax simplification will free an incalculable amount of brain power for use in more productive pursuits.

Can Giuliani get this done with the Democrats likely to control one or both houses in Congress? His record as Mayor of New York City offers real encouragement that he could achieve a significant chunk of it. Even though Democrats controlled the New York City Council by a 45-to-6 margin, Giuliani was able not only to keep spending below the rate of inflation and reduce the size of the city bureaucracy but also to cut taxes 23 different times, including the city’s income tax rates by 23% (which led to income tax receipts going up nearly 50%). As did Ronald Reagan, Rudy knows how to rally public opinion and to negotiate and horse-trade with his political adversaries.

One How-To and One Whodunit

Cut Carbon, Grow Profits: Business Strategies for Managing Climate Change and Sustainability–edited by Dr. Kenny Tang and Ruth Yeoh (Middlesex University Press, $80). Concerned about climate change? Then you will find this book timely and useful. The editors have brought together essays from numerous experts that provide an overview, as well as more nitty-gritty approaches that businesses can take to reduce carbon dioxide emissions and make money at the same time. Because their examples focus on the bottom line, Tang and Yeoh feel these comprehensive contributions will win a growing audience in corporate executive suites, not only in Europe and the U.S. but also in Asia, where there has been less green consciousness. A number of the contributors focus on real-life examples of various corporate actions that the editors rightly believe will be powerful persuaders and models for other policymakers in the corporate world.

T is for Trespass–by Sue Grafton (G.P. Putnam’s Sons, $26.95). Here’s a thriller that painfully reminds us of how vulnerable many of us will become as we get older and are hit with chronic conditions that require in-home care. Grafton, who consistently turns out grade-A novels, has outdone herself with her latest.

This chilling, poignant tale involves an injured 89-year-old man who ends up with a caregiver who decides to kill him slowly by poisoning his food. The fellow has only one known relative, who is far away and doesn’t want to get involved. The scheming caregiver, as she has done with other victims, shrewdly knows how to keep the elderly man isolated from concerned neighbors, including our private-eye heroine, Kinsey Millhone. We get Kinsey’s usual first-person case account but, in a shift for Grafton, we are also unnervingly brought into the amoral mind of the villain.

COMMENTARY: Europe’s political climate change

The economic super-boom is gone with the wind, and climate questions are outrunning terrorism as the number one global issue. This means more power for Europe.

COMMENTARY: Europe's political climate change
COMMENTARY: Europe's political climate change
COMMENTARY: Europe's political climate change
COMMENTARY: Europe's political climate change
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By Kari Huhta

Every January, the world’s great and good and wealthy and influential flock to Davos in Switzerland to share out wisdom with one another and with others.
The World Economic Forum collects in one place around 2,500 decision-makers from Bill Gates to Pervez Musharraf in a small town dwarfed by looming snowy Alps.
The organisers brag that the atmosphere at the WEF is always upbeat and informal, however tricky the subjects under discussion might be.

This year, apparently, the subjects were just too difficult. At the beginning of the meeting last Wednesday, there was an air of general bewilderment, and as the week progressed the confusion morphed into something increasingly close to tetchiness.
The problem for the world’s economic elite was not simply the credit crunch spreading out like some contagious disease from the US subprime mortgage crisis, nor even the economic recession skulking in the background to the crisis.
The cause was a general and deep sense of uncertainty. At the previous Davos gathering a year ago, the wise heads had not been able to predict where we were going.
Now it was as if they were at a loss to say even where we had ended up.

And just before the doors opened, the world’s financial markets had gone berserk.
First stock prices went through the floor, and then they bounced around crazily like some pinball machine on steroids.
To cap it all, news came through from France of a colossal banking fraud in the arbitrage department of Societe General, in which a rogue trader managed to take a position on stock-index futures – unbeknownst to his colleagues or anyone else at the bank – that cost his employers around EUR 4.9 billion in direct losses.

The American Nobel economist Professor Joseph Stiglitz from Columbia University voiced a common sense of frustration, listing a string of known unknowns:
“No one knows how far real estate prices will fall, how many mortgages will go into default, the extent to which the problems will spread to other credit markets, and the nature and effectiveness of the policy responses.”

The mood was no more relaxed at the Keilaniemi headquarters of Nokia in Espoo. There, too, was an air of almost unprecedented confusion.
On Tuesday, around 15,000 Germans had gathered in a demonstration in which a coffin was carried, draped in a Nokia flag.
German politicians noisily switched mobile handset brands. The reason was Nokia’s announcement that it is to close down its manufacturing plant in Bochum.
The inflamed passions that the decision generated took the Nokia President and CEO Olli-Pekka Kallasvuo by surprise. “Considering that the reaction was so strong, something could have been done better”, Kallasvuo pondered in a Helsingin Sanomat interview on Wednesday.

Over the Bochum closure, Nokia received something of the same angry response to that encountered by Stora Enso when it earlier announced its plans to shut down paper and pulp mills in Finland.
The volume of the anger came as a shock – it was widespread and it did not die away quickly.
There was no point in attempting to explain that other companies had shut down plants or mills in the past, and with far less hubbub surrounding the matter.
Or that the German mobile phone manufacturers, along with others, had themselves deserted the homeland several years ago.
That was then, this is now, and the difference was that conditions today are somehow different from what they were – and thus the decisions also have different consequences.

But what exactly has changed?
The answer to this has to be sought from a tangled skein of issues, a mixture of credit crunch, the struggle for energy resources, a threatening food crisis, struggles between competing political systems…
And thrown in on top, climate change.
But first, a little about the global economy. The best place to ask about the changes going on is where the money is, in other words in Davos.
“The current crisis is the culmination of a super-boom that has lasted for more than 60 years”, declared financial speculator and investor George Soros in a piece for the Financial Times on the eve of the Davos meeting.
Soros argues that we have seen periodic financial upheavals that have emerged, crises occurring since the end of the Second World War at intervals ranging from 4 to 10 years, and always precipitated by the boom-bust bursting of some bubble or another.
The crisis generated by the US housing market bubble is just one of these, and it does not adequately explain the whole mess.

In Soros’s view, what we are seeing now is the end of an entire era of super-boom and credit expansion founded on the United States dollar as the international reserve currency.
It went on for decades, but now the party is over, he claims.
George Soros may well know what he is talking about.
He is after all the gentleman who earned billions in 1992 by betting against the Bank of England and most everyone else on the fortunes of sterling, leading – after the pound was devalued – to his being nicknamed “The man who broke the Bank of England”.
However, the crisis can be seen from other perspectives than directly through the money markets.

From a European viewpoint, it is as if the political macroclimate has changed.
Climate change has politicised economic thinking. Both large economic ventures and the consumer’s use of the figurative remote control device are now being analysed from the standpoint of how they will affect climate change.
A walking, talking example of the special position accorded climate change is Al Gore.
The Nobel Laureate and Oscar-winning former Vice-President of the United States was there in Davos, warning again that the climate crisis was “significantly worse and unfolding more rapidly” than had been hitherto anticipated.
At much the same time in Brussels, the European Commissioners were setting out each EU member state’s emissions-cutting targets with the sort of dogged unanimity that could not be shaken by criticisms or counterblasts from the business community or the environmental groups.

Climate policy has already become the world’s #1 talking point, outrunning terrorism as the top global issue. And in the realm of global climate policy, Europe looks to hold a pre-eminent position.
The US administration’s delaying tactics and rearguard action to keep the economy separate from climate matters is clearly a lost cause.
The European Union’s leading role in climate policy is of particular significance, since right now we are going through a period of reshuffling the pack in terms of leadership positions: the United States clearly still enjoys absolute military supremacy, but its grip is slipping on the economic front.

The credit crisis in the world’s banks has only served to accentuate the importance of China and other emerging economies vis-a-vis Europe and the United States.
Banks are desperately looking around for new sources of financing from Asia.
On the corridors of global exchanges, the abbreviation UBS no longer automatically means Union Bank of Switzerland, but Union Bank of Singapore.

Europe’s economic outlook is brighter than that of the United States.
Furthermore, Europe currently enjoys more by way of international respect and clout.
The democratic and relatively prosperous countries that are the EU often appear more impressive from the outside looking in than they do to us on the inside – and now even internally the Union is starting to look surprisingly good.
It would nevertheless be more than a little premature to let out any indiscreet whoops of European triumph.

Politics are rising at the expense of the economy. The reason is that without the help of states the markets alone cannot resolve for instance the interwoven problems of global energy supply and food supply.
When the going gets particularly rough, companies turn for succour and assistance to the central banks – in other words to states.
In Davos this was expressed in such a way that the giant pendulum was now swinging back towards the state and away from the hegemony of the markets.

The motion can be seen in the way that people can demand a state – as a part-owner of the company – takes steps to prevent Stora Enso from closing its mills, or in the way that German Chancellor Angela Merkel can pick up the phone and call Olli-Pekka Kallasvuo about the Bochum handset factory closure.
In Europe, the French President Nicolas Sarkozy has emerged as the leading champion of the role of the state in guiding the ship.
Sarkozy defends France’s right to bolster the success of her companies by a policy of selective protectionism. The phenomenon itself is not a new one, but it is generally something that is met with argument and dissent. Sarkozy is making a virtue out of selective protectionism.
His vision is of a strong France supported by strong businesses, as part of a strong Europe.

In the eyes of those looking on from outside Europe, Sarkozy’s selective protectionist remedy means that Europe wants to avoid the downsides of globalisation but to gather up all the benefits.
Speaking in Davos, the World Trade Organisation’s Director-General Pascal Lamy warned that protectionism is a dangerous trap.
Investor George Soros took the same view, albeit Soros dressed it up in even more dramatic language. Writing in the FT, he charged that the end of the dollar-driven period of growth was fraught with dangers: “the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse”.
Soros himself regards great change and economic realignment – the decline of the US and the rise of China and others – as a more likely outcome than great catastrophe.
But it is not going to be an easy time.
When the positions on the economic podium shift, it is only to be expected that there will be efforts to change the political ground-rules for globalisation.

The events in the headlines over the past week show that Euope is living through a period of change.
We now saw some examples of what is going to change, and what is not.
Olli-Pekka Kallasvuo had to apologise to the Nokia workers in Bochum for the effects of closing down the plant.
And yet at the same moment, Nokia was being rewarded for its fourth-quarter and annual results and its tight economic discipline with a humungous double-digit increase in its share price on the exchanges.
Now which was the more important of the two?

To the investors, it is not strictly relevant whether the factory under threat of closure is a profitable one.
The investor is interested in how profitable the company is, and what is the return on capital invested.
And if that return happens to be better in Cluj-Napoca, Romania than it is in Bochum, Germany, then the factory will move to Romania.
In the new increasingly politicised climate, the next time a large corporation wants to shut down a factory – in Finland or elsewhere in Europe – the outcome will in all probability be exactly the same as it has been thus far. The factory will go. The company can only compromise on its profit targets if it does not need the investors’ money. And people worldwide are competing fiercely for that money.

Even so, an apology is a sign of change.
The redundancy benefits and other compensation paid by corporations may go up, and companies may make more strenuous efforts to find a new business to operate in the premises that get axed.
Just as happened in Kemijärvi on Friday, with the announcement of a factory to manufacture glued laminated wood beams being set up in the facility vacated by Stora Enso.

At Davos, too, the jittery mood settled down somewhat towards the end of the week.
The discussion turned at last to a slightly easier topic – the Middle East situation.

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