Rebates are not stimulus
January 22nd, 2008 by Matt HittleI think that the presidential candidates, as well as the Bush Administration, should take a few econ classes. At the very least though, they should read the Wall Street Journal.
If they looked today, they’d find Alan Reynolds’ great op-ed about their stimulus packages.
Reynolds discusses the fact that the economic stimulus packages proffered both by President Bush and all of the presidential candidates will likely not have any appreciable effect.
No candidate will become president soon enough to matter, and to ask the question is to presume that recessions can and should be avoided. But some business mistakes require time to be fixed. Too many houses were built in some areas, so prices have to fall to discourage more building and encourage more buying. Some banks made too many bad loans, so they need to become more cautious. Besides, if presidents really knew how to avoid recessions, why do we keep having them?
Nonetheless, President George W. Bush is now joining the election-year rush to “give the economy a shot in the arm.” A shot of debt, that is.
Reynolds also decries the emphasis put on spending, which some commenters here on FreedomTalks seem to think are a way to “stick it to the rich.”
We are nonetheless constantly told that consumer spending is the driving force behind economic growth or recession, simply because 70% of GDP is used to finance consumption. This demand-side fallacy arises from focusing on uses of income rather than sources. In reality, consumption depends on income and wealth, and income and wealth depends on business. If business is profitable, personal income from work and investments will rise and that will finance consumption.
Profits are partly dependent on sales volume, but also on margins. If a business is losing money on each widget, it won’t help to sell more widgets
Lastly, I think the final paragraph is hilarious:
Suggesting politicians should refrain from tinkering with the economy seems like standing in front of a runaway train and yelling “Stop!” Politicians on both sides of the aisle are already fighting to buy votes by “targeting” tax cuts and spending schemes toward their constituencies.
With luck, the end result may be merely wasteful and ineffective. If Fed Chairman Ben Bernanke acts on the belief that fiscal gimmicks offer a viable alternative to monetary policy, however, then putting unwarranted faith in ephemeral fiscal nostrums could end up being much worse than useless.
I agree with Reynolds. Most politicians aren’t well-versed in economics- save for Dick Armey and some others- and take their orders from constituents who are similarly ignorant. They need to wise-up and listen to their economic policy advisors.
Finally, for all those who think that rebates are a good idea, I urge you to check out Bruce Bartlett’s op-ed in WSJ last week.
January 23rd, 2008 at 1:21 am
The debt that we’re facing in this country is almost entirely caused by your lassie-faire, “supply-side” mumbo-jumbo. You can’t create the problem and then complain about said problem like you had nothing to do with it.
Do you agree then that Bush “bought” votes with his tax cuts and rebates of earlier this decade?
Ah, Dick Armey is a genius of the first order…oh wait…this is website too…coincidence? Thanx for telling us that voters are stupid too BTW.
January 23rd, 2008 at 5:01 pm
I share your frustration, Guy. And look at this quote:
The thing is, despite very real business profits over the past decades, real wages never went up, and in fact declined. Most Americans carry debt and do not have “wealth” in the sense that Reynolds means it. The truth is that while the economy has done relatively well, most Americans saw their earning power decrease while the wealthiest Americans saw theirs increase. And then we cut the taxes on the people who actually were making more money, while simultaneously requiring the middle class and poor to contribute an even greater portion of their income to cover the difference.
I agree with Reynolds that the housing market should adjust by itself and no further regulations should be introduced, but he’s dishonest about it. He chides Bernake for, I’d imagine, the rate cut (which is the biggest thing the Fed has actually DONE so far—the Fed can’t order tax rebates for example, so I’m unsure exactly what problem Reynolds has with them), but it’s actually a good rate cut for almost all Americans, most of whom are facing mortgage and credit card debt. The only people it hurts are the big “investors” who, as we all well know, are almost all very very wealthy.