Monday, January 21, 2008

How to Bail Out the Sinking Economy


You have probably noticed that the economy isn't doing so well right now. I check my 401k balance almost daily and note a steady decline. I don't like it. Of course, I do look forward to lower, buy-worthy prices in the equity markets. Regardless, Bernanke and our beloved politicians are ready to bail out the economy - or so they claim.

President Bush wants to put cash in the hands of consumers by virtue of a tax cut, i.e. you get a bigger tax return this year. The Democrats want to boost food stamps, create infrastructure projects (think CCC), and strengthen the unemployment coffers. Both claim they will make the changes temporary (funny...didn't Roosevelt call the New Deal temporary?). More details can be found in this article from CNN. Who has the right approach? You can probably infer my opinion given the nature of this blog, but I'll give you the reasons why the Democrats' plan is stupid and, believe it or not, but I'm not 100% behind the President's plan either.

There's an old expression that you can, "give a man a fish and he'll eat for a day, but teach a man to fish and he'll eat for a lifetime." Well...that's very applicable in the context of the Democrats' plan. The objective is to stimulate the economy in the short term as an attempt to reverse the recessionary trend. How does bolstering social programs (food stamps and unemployment) encourage productivity and investment in our economy? Does this not incentivize less productivity?

Infrastructure projects are a little better, but how are they short-term stimuli for the economy? Sure, they'll create some jobs, but it will take years for the politicians to fight over whose district the projects will happen in, identify the projects, get the necessary permits, select from the bidding companies, settle the lawsuits from the losing companies, and complete the project. Maybe in 10 years the impact of these projects will be felt, but keep in mind how many politicians will be getting paid out of this pool of funds before the economy feels any impact.

Having established that the Democrats' plan is complete rubbish, let's take a look at the Bush plan. Immediate tax breaks will certainly put cash in the hands of consumers and create a positive blip in the economy. Will it be enough? Does it solve the underlying problems with the economy? No. Temporary tax cuts are nice, but they don't solve the problem. How about we permanently lowering corporate taxes to levels comparable to Ireland? There has been rampant economic growth in Ireland since that country adopted pro-business taxes (All you supply-side economists are drooling at the thought). Bleeding heart liberals decry tax cuts because they benefit people that pay taxes and don't put money in the hands of people that do not make enough money to pay taxes...well, duh. Sorry, but does it really make sense for the part of your income going to the government to be channeled through a horribly inefficient federal agency and given to someone that doesn't pay taxes? Karl Marx would say "yes," but I'll give a loud and belligerent "no."

Do you think the temporary tax cuts are enough? This would imply there is no fundamental problem with the economy as if we're in an economic soccer match and we just need to tap the ball to get it rolling to the other end of the field. In this case, I would suggest we just ride it out and let the market correct itself. Why do we need government intervention if this is just a market condition? Sure it stinks, but there's no reason to pay interest on the money (because it would add to the national debt) if it serves no true purpose. In fact, it would be pure political maneuvering in an election year...hmmmm.

I do believe there is a problem with the economy: too much of corporate and personal profits are going to the government for no apparent reason other than to be mismanaged and wasted. I propose permanent and far reaching tax cuts to stimulate true economic growth. But then I'm also a fan of privatizing most of the government agencies (not really a Paul fan, though) and cutting costs to the point that the Federal budget balances - a foreign concept, evidently. Let's face it...we're all being crunched by rising energy prices and the cost of consumer goods - having less of our hard-earned money going to Uncle Sam would be welcome relief.

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