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 are the kinds of questions policymakers should be asking as they evaluate economic stimulus proposals?

The main question that should be asked is “are we doing more good than harm.”

There is only one thing policymakers should do – attempt to create individual confidence in the economy and the banking system and stay out of individuals’ economic decisions.  If government would reduce taxes and regulations and enable the private sector to flourish, the economy would return to health much more rapidly than if government increases regulations, increases taxes, increases spending and thereby increases debt.

Government stimulus typically refers to increased government spending.   Where does government get the money it spends? From taxes.   When government takes money out of the hands of the private sector and chooses where this money should be spent, policymakers are saying they know better what to spend money on than do the people who labored and created the money. If government chooses not to increase current taxes, then its increased spending has to come from debt.  The government borrows which means that either taxes must be raised in the future to pay back creditors or the debt is “monetized” .  This  means the Federal Reserve buys the debt with dollars it prints from thin air which leads to inflation. Monetization is simply a hidden tax – inflation.

The second question that should be asked is “are we inducing uncertainty about the security of private property”.  When Paulson and Bernanke panicked, going from one policy approach to another and when they turned from buying toxic assets to bank equity, the private sector had no idea what was going on.  It, therefore, panicked as well.  People have to believe their property is secure, that the regime of security over that property is not changing, and  that property will not be confiscated. Much like the early 1930s, people today are not confident that their property is secure and that what they earn with their labor they will be able to keep. A poll in May of 1939 asked:
“Which of the following comes closest to being your prediction of the kind of economic structure with which this country will emerge after the war?”

1. A system of free enterprise restored very much along the prewar lines, with modifications to take care of conditions then current. [7.2 percent]
2. An economic system in which government will take over many public services formerly under private management but still leave many opportunities for private enterprise. [52.4 percent]
3. A semi-socialized society in which there will be very little room for the profit system to operate. [36.7 percent]
4. A complete economic dictatorship along fascist or communist lines.  [3.7 percent]

Source: (Robert Higgs, 2007, Depression, War, and Cold War: Studies in Political Economy Oxford University Press, USA (June 22, 2006) ISBN-10: 0195182928

90 percent of the respondents thought that the future was one of socialism or worse.  No one wanted to  invest in such an environment and this is what current policymakers should focus on avoiding.