We have entered the great debate over public policy. Unfortunately, it has degenerated into finger pointing and blaming. I am going to try and bring some sense to it through some data, and some proposals for the joint subcommittee to actively look at. They aren’t right or left, Republican or Democratic-they are data driven. But it will prove a point; when it comes to economic policy there isn’t a third way. You are all in for free decentralized markets or you are not.
Some economists pointed out the fallacy of federal stimulus before it was passed. The failure of stimulus shows that Keynes is dead. It’s time to embrace the Chicago School, that was given up for dead.
Economists like Paul Krugman are saying we didn’t pass a large enough stimulus. In theory, he is correct. If we would have spent double or triple the amount correctly-we would have stimulated the economy. The debt generated would have been eaten up by the growth in the overall economy with time. Of course, that never happens except on an academic’s black board. Data shows that this is a fallacious argument without merit.
Let’s understand what a stimulus is as defined by Krugman. I don’t take $1 from Peter and give it to Paul. I borrow a $1 from Peter, and give it to Paul. Then I assume that we all are $1.50 better off. Do you understand the difference?
What happens to actual behavior? Peter knows the government borrowed from him and the way to get the money back is via taxes. “Tax the rich”. Peter adjusts his behavior today to prepare for the coming tax increase-even though the tax is going to happen in the future.
Even worse, Peter doesn’t work as hard. He might even drop out of the workforce. Paul hires lobbyists to get more stimulus money directed to him. That’s why the multiplier effect of stimulus is zero-or probably negative. All effort goes into competing for government dollars instead of growing the economy.
But, Krugman and the boys say, “No one really notices future taxes.” That point is debatable, but let’s say that Peter was going to do something else with the money. Maybe he owns a business and was going to spend $1 on more production. Now he can’t because the government borrowed it and gave it to Paul. Paul decides to buy a car with the $1. Does anyone care?