Recently I was asked a series of questions by a journalist wishing to write an article about the nation’s current economic situation. What follows in this article and others following over the next week is one of those questions and my answer to it.
What should be the goal of the economic stimulus — other than the vague idea of “stimulating the economy”? Is it to get consumers to start spending again? To get business to stop laying off workers/start hiring again? Both? Neither?
A stimulus will only be stimulating if it encourages the private sector to save, invest and consume. The most important component is private investment. Business must buy new technology, build offices, plants, factories, and hire workers. Businesses must create new jobs and be allowed to carry out the process Joseph Schumpeter called creative destruction. Private investment will occur only if the expected return on the investment exceeds the cost of capital. Uncertainty, current and potential tax increases and increased regulatory burdens, all work to reduce the incentive for the private sector to invest.