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What Is Economic Stimulus?

Discussion in 'Political Discussion' started by SammyBlueCat, Jan 21, 2009.

  1. SammyBlueCat

    SammyBlueCat Rookie

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    What Is Economic Stimulus?

    by Richard W. Rahn a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

    Added to cato.org on December 3, 2008

    This article appeared in the Washington Times on December 3, 2008

    How much should the U.S. government spend on an economic stimulus program? If you have trouble answering the question, it is because it is the wrong question.

    The United States (and the world) economy is (or at least has been for the last few months) in decline with rising unemployment rates. It is widely believed the government must "do something." The political and media classes, and even many economists, call for an "economic stimulus program." But what do they mean by "stimulus," and will it do any good?

    The argument is made that many Americans are suffering from a decline in income, and thus the government should give them money so they can buy more and put others back to work. Sounds good - but where does the government get the money? It must either tax someone else now or borrow more money, which diverts productive saving to current consumption. Either way, it is less than a zero-sum game.


    Every time direct government payments have been tried, they have failed. During the Great Depression, government spending soared as a percentage of gross domestic product, but full employment did not return until World War II. During the last eight years, U.S. government spending has greatly increased in both absolute terms and as a percentage of GDP, yet the economy now performs worse than it did a decade ago.

    When one person is taxed more to pay another person, the incentive to work diminishes and so the total income enjoyed by both people declines. The recipient might be slightly better off for a few months, but the economy (that is, everyone else), and eventually even the original beneficiary will be worse off. The government can only divert savings (through additional government bond sales) for a limited period before everyone will be worse off. The evidence is that the first Bush tax cut back in 2001, which was actually a tax rebate, did little good. In fact, it is now known that people saved much of the money, so the government borrowed some people's savings to provide money for others (or even the same people - who didn't spend it, but saved it). The lesson was learned, and in 2003 the tax rates were cut, which increased incentives for work, saving and investment and hence did a lot of good.

    The history of various economic experiments and sound theory (unlike much of the Keynesian claptrap) teaches us government handouts, or tax rebates, are unlikely to do any good and can often be counterproductive.

    It is widely believed the government must 'do something.'

    Some advocate government spending on infrastructure as part of a stimulus package. In theory, government infrastructure spending (highways, bridges, dams, etc.) can help the economy: if the project meets a solid cost-benefit test; if it is well-managed; if there is little or no corruption; and if it can be done quickly to help the current downturn. Do you want to bet your tax dollars on all of those "ifs"?

    If government handouts, tax rebates and infrastructure spending are unlikely to help, what can be done? First, recognize what caused the problem - misguided government monetary policy and financial regulation, which created the wrong incentives, and mismanagement of government-sponsored enterprises (i.e., Fannie Mae and Freddie Mac). Thus, Step One is for those at the Fed, Treasury, Congress, etc. to clean up the financial mess they created.

    The government could also cut the payroll tax for both employees and employers for at least two years to allow the economy to get back to full employment. A payroll tax rate cut would have the advantage of immediately increasing home pay for workers, while giving them added work incentives, and giving employers an additional incentive to retain or hire more workers. Critics of the idea will complain it will raid the Social Security trust fund - but since Congress has already spent the trust fund money on other things, the additional liability would mean little.

    A payroll tax cut will increase the deficit (and it is more costly than an across-the-board tax rate cut, but it has the political advantage for President-elect Obama that it would not be a further rate cut for the "rich"), but if it puts more people back to work and helps end the recession more quickly, the cost would be justified.

    As to the additional hole in the trust fund, the government could shift title to some of the land it holds (roughly one-third of all the land in the United States) to the trust fund.

    Politicians complain that companies have been shifting jobs to other countries. A major reason is that corporate income taxes in the United States are higher than other countries and regulations are more severe. So a good "stimulus" for job creation would be to cut the corporate tax rate to make U.S. companies competitive again.

    The stock market has plunged, in part, over fear the capital-gains tax rate will be increased. If Mr. Obama would say he will not increase the capital-gains tax and index the basis for inflation, the markets would jump, which would strengthen the balance sheets of many companies. And finally, if the congressional leadership and the president-elect would say they will allow the full writeoff (or at least greatly increase the current $3,500 limit) of capital gains' losses for any new purchase of stock or other productive assets, including real estate, there would be a rush to buy. Current limitations are unfair and economically destructive (the government takes part of the gain, but you take the loss).

    The above measures would be less costly and more effective than the various proposed versions of "dumping money out of airplanes," and would provide real "economic stimulus."
  2. Patters

    Patters Moderator Staff Member PatsFans.com Supporter

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    Of course, even the flat tax taxes someone earning, say $1 million, 10x as much as someone earning $100,000, so the flat tax is unfair, too. Are does the author favor a tax rate where everyone, regardless of income, pays say $50,000/year? After all, why should a rich person pay 10x as much as a middle class person for the same government services?

    Deficit spending worked well in Depression, though WWII provided the extra deficit spending that fully lifted us out of the Depression. (Why doesn't the author talk about deficit spending during WWII?) It also worked well during the Reagan administration, where we ran up deficits far greater than the tax cuts provided. The economy is fluid, so sometimes its better to cut taxes, while other times it's better to raise them; sometimes it's better to work towards a balanced budget, while other times, deficit spending is better.

    Offfering a full write off of capital gains losses is absurd. If would further corrupt the market by encouraging highly speculative investment. There would be a massive increase in scams, and given the fact that the stock market lost around 30% of its value, it would probably result in the US government being unable to meet its obligations.

    The idea of a government is to help its citizens. There is more to helping people than merely helping the stock market, something which the author of that piece does not seem to realize.
  3. Real World

    Real World Moderator Staff Member

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    The gubmit can spend $1 trillion, and hire a couple of million people, but at some point someone is going to have to pay that trillion dollars, plus interest. Sure, the trillion spent today will have a sooner, rather than later effect on the economy, but what will it's long term ramifications be?
    Last edited: Jan 21, 2009
  4. SammyBlueCat

    SammyBlueCat Rookie

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    Disagree. This government was instituted to protect the citizens not to help them. Read article 1 section 8 of the US Constitution.
  5. Patters

    Patters Moderator Staff Member PatsFans.com Supporter

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    This is the preamble, I added the numbers:

    "We the people of the United States, in order to form a more perfect union, (1) establish justice, (2) insure domestic tranquility, (3) provide for the common defense, (4) promote the general welfare, and (5) secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America."

    Article 1, section 8 merely states the tools at the legislative branch's disposal to achieve the more perfect union.
  6. wistahpatsfan

    wistahpatsfan Rookie

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    #75 Jersey

    The preamble is not law.
  7. Patters

    Patters Moderator Staff Member PatsFans.com Supporter

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    The preamble explains the goals of what follows it, so it certainly has legal relevance.
    Last edited: Jan 22, 2009
  8. Wildo7

    Wildo7 Totally Full of It

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    I see a lot more here than simply "protect," and by "protection" I'm guessing you falsely assume only Nation Security:

    This is an outline of the powers of the Legislature, not the entire United States Government. And where exactly do you get this limited notion of protection-only from?
    Last edited: Jan 22, 2009
  9. Wildo7

    Wildo7 Totally Full of It

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    It doesn't really matter whether the preamble is relevant to specific law, it specifically describes what the government was formed to do, which goes beyond "protection." To claim that the government was set up only to protect and not help it's citizens when the introduction of the founding document specifically states otherwise is fallacious.
    Last edited: Jan 22, 2009
  10. Real World

    Real World Moderator Staff Member

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    I don't see creating a welfare state in anything, anyone posted. Where's it say welfare state inside the Constitution?
  11. wistahpatsfan

    wistahpatsfan Rookie

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    #75 Jersey

    I'm not saying that the government shouldn't help out its citizens. Never said that. All I said was that the Preamble is not any kind of law. What follows in the codes is the legal foundations of all of our laws, obviously. The preamble is just a literary introduction that most all documents have. It describes the piont of view of the authors only. Never has the Preamble been used to justify any court decision.
  12. Wildo7

    Wildo7 Totally Full of It

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    Doesn't say either way, probably because they lacked right wing talking points back in the day. The following sentence seems to leave it pretty open to interpretation deliberately, though I suppose when Jay Severin wrote it he forgot to be more specific:

    Last edited: Jan 22, 2009
  13. patsfan13

    patsfan13 Hall of Fame Poster PatsFans.com Supporter

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    Article says that powers not explicitly granted by the Feds in the constitution is reserved for the States, and dor individuals. The intent of our founders was that the Constitution, was to LIMIT the power of government and protect the citizens FROM the government. Sadly these principals have been trashed...
  14. Wildo7

    Wildo7 Totally Full of It

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    You mean powers beyond "general welfare?" Yes I agree. Here are the enumerated limitations on Congress:

    The intent is clearly to protect the people from government in regards to civil liberties. Beyond that social programs easily fall under "general welfare." Also, the 10th Ammendment doesn't say "explicitly granted" it says "delegated," with promoting the "general welfare" being one of those delegated responsibilities, along with taxes:

    The right wing today projects privatization and a number of Laissez Faire economic principles onto the constitution, and this notion of "protecting the people from the Government in all it's forms" but that is nowhere to be found in the Constitution, nor does it logically follow that social programs are in any way an infringement on individual civil liberties mentioned in the constitution. The framers were concerned with individual rights, not economic models.
    Last edited: Jan 22, 2009
  15. Real World

    Real World Moderator Staff Member

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    Yeah, that's right, they didn't explicity write "don't give someone else's money to someone else" in that goddamn piece of paper, so therefore they must have approved of the welfare state.

    "The democracy will cease to exist when you take from those who are willing to work, and give it to those who do not."

    -Thomas Jefferson-
  16. Real World

    Real World Moderator Staff Member

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    I think we can all agree, at least certainly those of us with a decent amount of common sense, that all of the founding fathers would pretty much puke in their mouths a little bit, if they saw what the US gubmit has become.
  17. Wildo7

    Wildo7 Totally Full of It

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    In context, Jefferson is clearly referring to tyrannous tax policies of the British and ruling men, taking money from citizens and lining the pockets of rulers with it. Nevertheless, I don't see Thomas Jefferson's quote in the constitution, nor do I see this quote of his:

    Though the right I'm sure likes to ignore that common stance amongst the framers among many others.

    The personal opinions of the framers with regards to a pre-industrial economy are specifically left out of the constitution because the framers had the forsight to understand that only a fool would pretend to be able to foresee economic evolution. That's why the constitution only talks about specific individual liberties and the structure of government.

    And as for their disgust with the government of today, I'm sure we'd all agree but for very different reasons.

    But again, the extra-constitutional views of the framers with regards to pre-industrial agrarian society are not enumerated in the constitution.
    Last edited: Jan 22, 2009
  18. Real World

    Real World Moderator Staff Member

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    I'm not a bible bopper, so go talk to foggy about that crap. I don't go to church.

    As for Madisons words, I'm trying to figure out what you're point is with respect to the welfare state. Is Madison in some way advocating that the hard earned dollars of a working citizens should be given to someone else? Absolutely not. His words begin with:

    Today he says, and last I checked, there wasn't any welfare state back then.


    Banks, politicians, tycoons, free loaders, the gubmit...


    The working people can't be forced to pay for everyone else (Banks, politicians, tycoons, free loaders, the gubmit...) and when the breaking point is reached, it's Boston Tea Party time all over again. ;)
  19. Wildo7

    Wildo7 Totally Full of It

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    Once again, none of this is in the constitution, so it's largely irrelevant. The constitution was an agreement amongst the states, not an edict from 7 men. When they talk about the known economic model of the time period (not the rise of corporate power and conglomeration of wealth and resources) they aren't referring to money being taken from the rich and given to the poor, they're talking about those in power lining their pockets through the labor of others, and their comments in the context of the times are not scripture. I don't know anyone who agrees with a corporate welfare state that pays "banks, politicians, tycoons" except those that profit from it, so in at least one aspect we're in agreement.

    I put Madison's quote in their because despite the feelings of the times, Madison clearly intends for unforeseen economic and power changes to be dealt with by the common sense of the people. The number one thing the founding fathers were concerned with was tyranny and power, and we can argue until we're blue in the face as to whether the corporation has supplanted the government in terms of a power apparatus, but it is not a constitutional argument.

    My position is that the opportunity of the poor and middle class in our society to educate themselves and work their way out independently in a corporate society is vastly different than it was in pre-industrial times. The fact that one power apparatus has arisen to replace another in ways the founding fathers could not possibly have known has no bearing on the constitution or the framers individual beliefs towards traditional government power.

    I could argue with you all day about whether what you call the "welfare state" is an adequate or correct way to combat this concentration of power and tyranny but this is not a constitutional argument as the actual constitution says nothing about the "welfare state" or the model of power today. In the times of the constitution, for example, nobody was confined to a urban community with terrible education and no job opportunities; if somebody wanted to work they found a plot of land and made a farm for themselves, so the situation they are talking about is not analogous. The principle of the lazy welfare recipient caricature taking $150 a week and drinking 40s may be your primary concern, but mine is the people who simply cannot survive and raise a family in their current situation (a rising population), and I don't believe the number of people in the former category is representative of any significant or seriously burdensome percentage of "entitlements" or "the welfare state." Above all, the founding fathers were free thinkers and students of political philosophy, much like the University professors you despise today, and I can guarantee that they would be primarily concerned with any form of power present today and in favor of equality of opportunity.
    Last edited: Jan 22, 2009
  20. Real World

    Real World Moderator Staff Member

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    The problem is that you see it as a corporate, and rich problem, whereas I see it as an overall erosion of how this country was originally intended to be, when first created. I see a multitude of problems from top to bottom, and bottom to top. People with more money will always "get richer" as it's a matter of basic mathematics. I don't despise the "rich" because of what they have. I merely want this country to do what it was intended to do, and that is provide every citizen with equal rights, little taxation, protection, individual freedom, and the ability to prosper. Somewhere along the way this nation has moved away from those simplicities, and become a jumbalaya of special interests, from all different sides of the political, and personal isle.

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