Wednesday, February 11, 2009

Stimulus That Will Definitely Work

Put away the political one liners, regardless of source. Put away the economic journals and their mathematical models. Put away the college text books and their antiquated Keynesian-Classical-Neoclassical-New Keynesian debates that never reach a conclusion. Put them all away and think, just think for a minute.

Consider these simple, straightforward, transparent statements. Decide which you think are true.

(1) Economic prosperity requires production of real goods and services that people want.

(2) Businesses, small and large, produce real goods and services; production of real goods and services is the only real source of real jobs.

(3) Government produces almost no goods (see if you can name a good that government itself produces; I haven't been able to think of one just now), but when legislatures direct spending, government can cause goods to be produced by businesses.

(4) Government does produce several services we all want (e.g., national defense, police services, the justice system, and lots of others) and other services not everyone agrees that we want (e.g., regulations and the bureaucracies needed to make them up, Amtrak, the Post Office, and lots of others).

(5) Businesses produce real goods and services that people want only if businesses believe households and other businesses will buy them; businesses have to take on the risks of production before households will have an opportunity to buy; businesses that do this well succeed; business that do this poorly fail.

(6) Households will buy goods and services they want if they have current income to do so, and if they believe their future income streams will continue in the anticipated future; households do not just take a wild hair all of a sudden and simultaneously quit buying goods and services, even though that's the usual explanation offered up for why a recession begins.

(7) If households have more disposable income, they will spend most of it on goods and services they want; current income households save instead of spending will end up rather quickly in a loan to either a business or the government, either of which will spend it rather quickly (it will not end up in the mattress, for the most part).

(8) For the most part, households know best what to spend their current income on.

(9) For the most part, when government decides what to spend money on, some people are happy about it and other people are not happy about it.

(10) Because we have about 130 million households, putting additional current income in the hands of households will result in more and faster spending on goods and services that households want---much more and faster than putting additional money in the hands of government bureaucrats; an added benefit is that households spend on goods and services they want.

If you agree that all 10 of the statements above are correct, then permanent tax cuts that require a dollar-for-dollar reduction in government spending would be the logical economic stimulus that will work most efficiently and fastest to restore the economy to growth. Whether the tax cuts are income tax cuts or payroll tax cuts is worth thinking about. A choice between the two taxes has implications for which households would have what additional income to spend.

If you don't agree that one or another of the 10 statements above is correct, then by all means, replace it with a statement you do think is true. But whatever you believe is true, follow the combination of those statements to a logical conclusion about what will restore the economy to growth.

Quit listening to politicians and economists alike. Think for yourself. Good thinking.

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