Paul Krugman in the Sunday Denver Post, “Obama needs to tell it straight with stimulus,” is again using faculty economic theory and an erroneous interpretation of economic history to persuade the political establishment that the current stimulus package is not working, not because it was misguided, ineffective by design, and failed to meet the administrations own guidelines for a good stimulus package; timely, targeted, and temporary, but because it was too small. The huge, nearly $800 billion, did not increase government spending by enough!
Let’s remember, however, over 200 prominent university economists, in a Cato Institute sponsored add (http://www.cato.org/fiscalreality) run in numerous newspapers across the country in late January 2009, correctly argued,
“we … do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the U.S. economy out of the Great Depression in the 1930s. More government spending also did not solve Japan’s ‘lost decade’ in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the United States today.”
The job loss and continuing economic decline has been driven by lack of business confidence and ‘regime uncertainty’ as exhibited by the precipitous drop in Gross Private Domestic Investment of nearly 30% from its most recent peak. Economic performance and job growth will not rebound without a rebound in business investment.
The prospects for such a rebound are bleak in the current policy environment. We see massive expansion of government spending and huge deficits as far as the eye can see, a guaranteed massive tax increase when the 2001-2003 tax cuts expire automatically in 2010, threatened (and actual in some states already) tax increases on the rich (those making over $250,000), a proposed cap-and-trade policy to fight global warming, which is in fact a massive tax increase on production and on any consumption activity that uses fossil-fuel-based energy. Instead of privatization, we see major government takeovers of private business in the automotive and financial sectors, which are often conducted in ways that violate contracts and supersede the rule of law. We see wasteful government mis-directions of production through subsidies and directives such as an energy policy that promises “green jobs,” but is an energy policy missing one key ingredient: delivery of affordable reliable energy. What we have is a significant assault on freedom and the market, which has predictable short and long-run negative impacts on the economy.
The way to recovery was correctly highlighted by the above mentioned economists, “To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment, and production. Lower tax rates and a reduction of the burden of government are the best ways to use fiscal policy to boost growth.”
If we are going to make another attempt, let’s please get it right!