Wednesday, February 13, 2008

No Laffing Matter

Arthur Laffer deconstructs the "stimulus" package on the pages of the WSJ this morning. He thinks it will do more harm than good and explains it in a way that anyone can understand. Taking money from a group that saves and invests and giving it to a group that is likely to spend it sounds good for the short term but the longer term effects are negative.

But even though the income effects net to zero, the substitution effects accumulate, and they accumulate in a most unpleasant way. This should be obvious to even a person untrained in economics. Ask yourself why not a $40,000 rebate per person, indexed for inflation of course, if a $600 rebate is so good. Heck, why don't we give rebates equal to GDP, so that everyone who doesn't work and doesn't produce receives everything, and all those who do work and do produce receive nothing?

GDP would go to zero in a New York minute if workers and producers got nothing for their work effort. And, as fate will have it, any rebate will reduce output because it reduces incentives to produce output. The larger the rebate, the greater the reduction in the incentives to work and the greater the reduction in output. It's as simple as that. This $170 billion rebate camouflaged as economic stimulus will deal a serious blow to the economic health of the country.

But there's also collateral damage. Few in Congress understand or care. They think their actions either don't matter or that they would see a positive impact from their actions if only they did more. If the economy worsens and when their political sensors become alarmed, they'll up the dose, and goodness knows just how far this vicious cycle will take us. A quick glance back at the 16 years of presidencies of Lyndon Johnson, Richard Nixon, Gerald Ford and Jimmy Carter should give you pause. Whenever you observe bipartisan cooperation, hold on to your wallet and run to the basement.

I never watched That Seventies Show because I lived through that miserable time. I don't think I'll like the sequel any better than the original.

No comments: