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.

“But the risk of doing nothing, the risk of the security of this country being jeopardized at the hands of a madman with weapons of mass destruction far exceeds the risks of any action we may be forced to take.”
George Bush, 2-25-2003

No weapons of mass destruction were found and virtually no evidence was found that Iraq had ever contributed to Al Qaeda before the invasion.  Since the invasion Al Qaeda has been rampant in the area along with numerous other terrorist groups.

“We can help the American people by quickly enacting a program to stabilize the financial system.  We must do so in order to avoid a continuing serial of financial institution failures and frozen credit markets and threaten American families’ financial well being, the viability of businesses both small and large, and the very health of our economy.”
Henry Paulson, 9-24-2008

The graph should say it all.

Regarding the proposed stimulus package:

“No plan is perfect, and we should work to make it stronger, but let’s not make the perfect the enemy of the essential.”
Barack Obama, 2-4-2009

“A failure to act, and act now, will turn crisis into a catastrophe and guarantee a longer recession.”
Barack Obama, 2-4-2009

Rest assured that these are not the first times in the history of democracy that politicians have used fear to gain votes.

Life and liberty are two things that all Americans hold dear – or at least they should.  Because we live in a democracy we are all responsible for our futures and our government.  As such, when a democratic government wishes to strip its people of their rights to life and liberty it must convince its people that there is good reason for it.  Second only to physical pain, fear would have to be the most influential feeling to a human, and politicians know this.  Nothing gets people to do unspeakable acts quite like fear.  Imagine the things you would do at the point of a gun.

Our government has gotten out of hand.  They are using fear to take our money and limit our freedom.  This is not a call to action, but rather a call to reason.  Use your minds and see the government’s tricks for what they are.  Don’t let your liberty be stripped of you this easily and don’t vote for those people that will try to do it.

There is nothing that will more adequately and rapidly cure us of this economic downturn than freedom.  Free markets will demand efficiency and production and it is what they will yield.  If we want to prosper again; if we want to be free again we must turn to freedom as the answer.  Government can only strip our liberties and take our money with our consent – the people’s consent.  I say we deny them that consent.

One of the few good things that FDR ever said was, “The only thing we have to fear is fear itself.”

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.