The "stimulus" package
Topics: Taxes
19 Jan 2008
From: Ervan Darnell
The current economic downturn seems likely caused by the "mortgage crisis". The mortgage crisis is the result of a lot of reckless borrowing (and reckless lending) by people who couldn't afford the terms. What is Bush's prescription [1] for reckless borrowing? Yes, more reckless borrowing in the form of federal borrowing to inject cash into spenders' pockets in the hope they will engage in reckless spending with unwise debt, exactly the problem that got them in trouble to start with. Spin this the other way: How can a recklessly spending Congress possibly know enough to help recklessly spending consumers?
The tragedy I suppose is the stock market downtown will increase the chances of a Democrat being elected for the wrong reason. The utopia fallacy seems to operating here: if things aren't going well, the government must fix it. I especially hear this argument for health care. It just skips over the question of whether or not that's possible.
If the government could stimulate the economy during a recession, why couldn't it stimulate during a boom? It can't of course, in either case. But we feel it necessary to try during a recession. I take this as evidence of the psychology argument above. The right question is what works better, free markets or socialism, not what brings utopia.
You might argue that this isn't really meant to stimulate the economy in the long run, but only meant to borrow against the boom times to soften recessions. That's not how it's being sold politically. But even this claim doesn't work, for at least two reasons:
1) The government does not know when the bottom is. It might be making a future lower low even worse by saddling it with interest payments in order to help a medium low now. The best indicator we have is the stock market exactly because people with money at risk are intensely interested in future expected profits and they are betting on those now. But once the stock market heads back up, there is no problem to fix.
2) Even if the government knew where the bottom was, this approach only makes it worse. It only pulls money out of productive investment in new things we want (that would truly improve the economy) and encourages people to spend it on things we don't really want.
The political angle is obvious. Bush wants to buy the election for Republicans. He's perfectly happy to create bigger problems next year to get through the election. I guess in some small way I want him to succeed just so this bit of irrationality balances the utopia-fallacy irrationality causing people to favor Dems more than they should.
The Dems are no better here. They have been complaining about Bush's deficit, the debt owned by China, etc. but now they are ready to make it worse too (as evidenced by Clinton's proposal and early House reaction). At least they should have the integrity to stop offering the deficit as a reason to oppose the Iraq War (the cost, yes, but the deficit, no).
[1] http://www.nytimes.com/2008/01/18/business/18cnd-econ.html
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Ervan Darnell
ervan@kelvinist.com http://www.kelvinist.com
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