Stimulating Something Other than Lethargy
Stephen Spruiell argues that there have now been five rounds of stimulus spending by the federal government, totaling $1.085 trillion, which surpasses the cost of both wars in which our nation has been engaged over the last decade. He further argues that the approach that the government has been taking has been flawed in its very principles.
This isn’t just a matter of wasted money, because the mounting debt will eventually come due and, moreover, the debt is creating a bubble likely to pop, moving us (at last) to the ultimate “too big too fail” collapse. Not surprisingly, I like his proposal for a reworked stimulus policy:
Keynesian economists also argue that scaling back stimulus spending might actually hasten a debt crisis. Cutting spending during a period of economic weakness, they say, would depress growth, which would depress tax revenues, which would make debt service even more difficult. The reason they are enchanted with this argument is that it never occurs to them to cut spending and tax rates simultaneously. To be clear, I am not claiming that tax-rate cuts would foster enough economic growth to pay for themselves, but there is strong evidence that they would foster more growth than deficit-financed government spending would — evidence that economist N. Gregory Mankiw recently summarized in the journal National Affairs. The incentive effects of tax-rate cuts would more than offset whatever harm (my guess is: very little) might accompany spending cuts of an equivalent size. Meanwhile, the spending cuts would offset the revenue lost to the tax cuts.