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 is one of those questions and my answer to it.

How bad is the situation really?  Certainly that’s an important factor to consider when judging the costs/benefits of a stimulus package?

The situation is serious but nothing compared to the Great Depression right now.  I stress right now, because if the government attempts to follow FDR’s approach in the 1930s, we could see a ten year deep recession. People are uncertain and have real concerns over their financial situation now and in the future.    Why was the Great Depression the Great Depression rather than a simple recession – why did recovery take so long?  The most important factor was a combination of errors on the part of the Federal Reserve and the hostile attitude that the FDR administration had toward the private sector.  Roosevelt said that businessmen as a class were “stupid.” Business leaders sincerely believed that the government was in evil hands…and preparing the way for socialism, communism, or some other variety of anti-Americanism. In 1935, 1936, and 1937 the Roosevelt administration requested tax legislation aimed at punishing the wealthy. This created a business hostility toward Roosevelt and resulted in an unwillingness to invest.

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 is one of those questions and my answer to it.

Is it important to consider the plan’s ROI?  How is that measured?

For the private sector there is an ROI that can be calculated.  There is no such thing for government projects.  Once it is recognized that a government spending project is not a voluntary decision by individuals to government but instead is coercive, is a taking, the opportunity costs are higher than the return the government could generate.  Governments do not care about efficiency, about maximizing shareholder returns, about quality.

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 is one of those questions and my answer to it.

When talking about government spending (and tax cuts, for that matter), is it important to maintain a high level of transparency?  To avoid pork-barrel projects?  Can that be done?  How?  How can those needs be balanced with a need to act quickly (if such a need indeed exists)?

The only difference between pork barrel projects and non-pork projects is whether the spending is directly voted on or not. Is a bridge to nowhere pork? Is the construction of a university building by the government pork? Is a light rail system pork? Yes, if the expenditures were legislated without direct vote by Congress. To say pork is wasteful and non-pork is not, misses the point. All government spending is wasteful because it takes money out of private hands, away from those who labor and create it thereby reducing their incentive to labor and create more.

The government of the US and the government of Arizona could stimulate the respective economies most by cutting taxes: cutting personal taxes and instituting some form of consumption tax to replace the income tax; cutting corporate taxes and instituting some form of flat tax. The US government should immediately cut corporate taxes below the levels in Ireland, Ukraine, Georgia, the Czech Republic, Poland, and Hong Kong, the nations with the lowest tax rates. The state of Arizona should cut corporate taxes to the lowest rate in the country. The lower taxes will stimulate private investment; it will attract businesses to the US and to Arizona. It will work better and much quicker than spending on zoos, roads, or other so-called infrastructure.

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.

How should policymakers balance, as the AP put it, “the competing interests of economic stimulus and deficit control”?

The degree of the negative  effects of deficits will depend crucially on how they are created.  Increasing government’s role in the economy, increasing spending and taxes, will harm the economy, now and in the future.  Reducing taxes and reducing the role of the government in the economy, will benefit the economy, now and in the future.  If a deficit is created because the government cuts taxes, then the deficit will be short lived. History has shown that government revenues increase following tax cuts so that the deficits created by the tax cut are temporary.   If a deficit is created because the government is replacing the private sector, deficits will be long lived.  Increasing taxes to pay for these deficits will reduce government revenues and prolong economic downturns.

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.

It makes sense that policymakers should be considering a range of policy options to stimulate the economy.  What are some of the best options (most value for the dollar) out there?

I beg to differ.  It does not make sense that policymakers are considering a range of policy options.  There is really only one thing that should be done – ensure that the return on private sector investment exceeds the cost of capital.  This can only be done by ensuring that taxes are reduced, uncertainty about rules and regulations and future taxes is reduced, and prices are allowed to adjust so that the market can begin functioning.  Propping up house prices or other prices such as  wages, does nothing but prolong the pain.

Why would government bureaucrats and policymakers know what creates value better than private individuals who risk losses, who labor and innovate and create the income?  Economist F. A. Hayek described this as the fatal conceit of policymakers.

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.