What's the Best Way to Spark the Economy?

Great Debates
1

Every time we get into a political thread, we have people arguing about whether or not the Bush tax cuts and such are going to revivify our under-the-weather economy. And comments about tax-and-spend Democrats vs. the strong economy under Clinton. And, of course, everybody’s operating under different premises and doesn’t agree with the other guys’ premises, with a net result of dual monologues. So I offer you the following set of comments on how to spark the economy. Add your own or debunk mine if you feel they’re wrong.

  1. Tax cuts or government spending are not going to help out the economy. Tax cuts are invested or spent by the people who get them, but not usually in ways that serve to produce the amount of economic stimulus that is lost by the programs cut to make the tax cut (or by the negative impact of the deficit spending that results if programs are not cut). On the other hand, government seems incapable of spending money wisely in economic terms – significant amounts are diverted to managing the program spending the money, and the specific things that government can spend money on are rarely things that give a significant boost to the economy.

  2. One quick way to produce a stimulus without sacrificing anything is to redefine all regulations in terms of the desired outcome. Instead of rules specifying the detailed care and feeding of each industrial chemical, the general rule would be that only trace amounts of a toxic chemical may be released into the outside environment (the rule being a bit broader than this to take into account degrees of toxicity and the environmental capacity to absorb – CO2 is clearly much less of a problem than plutonium perfluorarsenate!) An act of eminent domain must show a clear nexus to a necessary government action to be valid, and a fast-track hearing process put in place to confirm or reject this. And so on.

  3. Abolish all “economic development” programs that consist of government-paid lobbyists to business to solicit their building and operating in a given community. Instead, the community designates one or two specific industries that it seeks to have locate there, and moneys expended to do that locating are tax exempt. States and defined regions identify industries needing strengthening, and income from venture capital invested in companies in those industries is tax exempt.

  4. The use of “shell” corporations to shift losses and titles to avoid equitable actions by the businesses engaged in them shall be declared illegal. Any such “corporation” becomes an invalid entity, and liability for its actions falls on its owners and executives.

There are three quick reforms for debate, and my opinions on why two standard tactics don’t work. Have at it!

2

Government spending and tax cuts stimulate the economy by providing people with more disposable income and by providing jobs. To a certain extent, some government spending is required to break the “companies wont hire/expand because there’s no demand - there’s no demand because people don’t have jobs/money” cycle.

This probably won’t help.

Companies should have the freedom to move in and out of whatever regions or communities are most condusive to their business. Communities already have the ability to offer incentives like tax breaks to companies they want to attract.

Could you give an example of a “shell” corporation?
In general, the economy is stimulated when government spends more and places less restrictions on business. Your proposal seems to do the opposite.

3

For the government to spend money, it has to take that money from the people who create jobs and use their money in the economy. Basically, government spending is just taking a certain percentage of the people’s money and forcing it to be spent in a certain way. Some people would argue that’s good, because the people don’t spend it in the way that would most help. Others say it’s bad, because the government spends inefficiently. Myself? I don’t think some Harvard economist sitting in an office up in DC necessarily knows better how to spend money than anybody else does. Economic planning is dicey, it just seems like such an unpredictable field.

My own opinion is that economies rise and fall with market cycles that government can’t do much about. J. M. Keynes’ greatest crime was making meddling bureaucrats and ivory tower economists think that they could solve all the world’s problems. The only thing the government can really do is just make the recessions less painful for the people they affect and help everyone ride them out until better days. Whether it ought to do that is another topic entirely. Extending unemployment benefits might serve to maintain a level of consumer spending, but it’s unlikely that people continuing to pay their rent and buy groceries is going to provide any significant spark. It just preserves the present spending levels. No, if you’re gonna give those people that money, it’s because you want to lighten the impact of the recession on them, not because you think it will improve the economy.

4

Almost everyone will tell you that the private sector is more efficient than the gov’t, yet people still think that gov’t spending money can stimulate the economy. I don’t see how the private sector, spending the same money, would NOT more likely do more good for the economy. And just because people may “save” money instead of “spending” it, doesn’t mean it’s buried in the back yard. Saved money is invested money.

Uncertainty is the biggest bugaboo for business. The whole Iraq situation is causing people to be more cautious. (I’m not advocating that as a reason to go or not to go to war, simply stating a fact.) The sooner we can get either the war or non-war option behind us, the better.

The is a simple rule of thumb about gov’t interferance in the economy: If you tax something, you get less of it. If you subsidize something you get more of it. The gov’t tends to tax success and subsidize failure. To the extent that it does less of either of those things, the economy will be better off.

The gov’t should do whatever is necessary to keep interests rates low and stable. That’s probably the single most important thing it can do. A balanced budget helps. Cut spending to put it in line with tax receipts. All entities (excpet gov’t) seems to be able to cut expenses in hard times. My company has many times told all mgrs to cut expenses 10% (or some odd number). When you don’t have a choice, you just do it. It’s really not that hard.

5

If I had to choose I would go with two items:

First, bring the budget back closer to balance. I’d like the damn thing balanced but hey, my little girl would like a unicorn, too. While in a recession (or a period of very slow growth…which is more true) running up the deficit is going to increase the price of credit in all forms for all people and place a spending restraint on everyone except the government. Heads up in interest rates start rising because the available dollars go down.

Second, get the government away from the ‘spend! consume!’ mode of encouraging economic growth. I prefer to place incentives to promote savings. That goes into the market, or into CD’s or some such that large-scale institutional investors can use to pick and choose efficient, profitable companies to finance and promote job growth.

Do those two things and you’ll start seeing a swing. But these things take time. It won’t happen in a fortnight.

6

That sort of remark should be argued and not just asserted.

Polycarp, the suggestions you have aren’t really for “sparking” the economy. Fundamental changes to regulation, for example, may help or hurt economic activity but they’re not the sort of thing you probably want to wrestle with everytime the economy has swung too far one way or the other. What happens when it heats up too much, will you suggest enacting rules that are inherently more red-tape intensive?

Sparking the economy means getting it out of a slump. Conversly, cooling the economy would be doing something to dampen it when overheated. As an example, deficit spending is always a popular theoretical answer to goose economic activity. An economic slump is, more-or-less by definition, a time of depressed economic activity. People aren’t spending or investing. If they were, then GDP wouldn’t be going down! In that case, the government would borrow some of the money that is being underutilized and put it to work by purchasing stuff. That money is then spent by those to whom it was paid, then it is spent again and so on. If government borrowing and spending were to crowd out more productive economic activity, then by implication the money borrowed would be out there working and the economy wouldn’t be in a slump.

The other side of the coin is when the economy is overheated. In that case, the government might tax more and spend less–creating a surlpus–in order to dampen the overall amount of economic activity going on. IIRC, these two interventions should more-or-less balance out over time. Unfortunately, politicians’ meagre understanding of Keynes is limited to a misunderstanding the recession side of his work and not the boom side.

It’s not just a question of government spending vs. private spending. If it were, then I would imagine that most economists would agree with your point #1. Here is an online macro text that you may benefit from reading. It is the one on the syllabus for one of the actuarial exams; it’s endorsed by the SOA and CAS, for what that’s worth. I think it’s an okay treatment. It does not tell you that you can solve all the world’s problems.

As for this slump, I have to agree with John Mace on this point: “The sooner we can get either the war or non-war option behind us, the better.”

7

**

Economic stimulous is not a generic thing. Saying what will stimulate the economy is a lot like saying what will cure a sick person. You have to diagnose the problem first.

Our current situation has quite a few components, and I’ll be glad to go into detail about them, but the quick summary is that our economy isn’t sick it just partied irresponsibly and has a terrible hangover. That’s compounded by the current environment of political certainty and the fundamental cyclical nature of such things.

Taxes place a demand on the economy, and in its current hungover state easing those demands is not a bad idea.

The simple fact is that it really doesn’t matter what we do until the hangover is over and the political uncertainty is resolved. Things will continue to suck. The idea that we have a great deal of control over the business cycle is about as true as the idea that we have a great deal of control over the weather. That is, we have essentially none. The best we can do is try to mitigate its effects.

Not that I think better and clearer environmental controls are a bad idea, but I don’t think they can be construed as an economic stimulous.

I ahve some experience in this area, and I also don’t see how it becomes a general economic stimulous.

A good idea in theory, I have no idea how you put it into practice. I also don’t understand how it’s an economic stimulous.

**
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The only way out of a recession is to encourage spending. The surest and best way to do it is to incent producers to spend and expand. They won’t do it unless they see a market for their goods and services in terms of customers.

The government can spend or the consumer can spend, or you can do both.

For a stretched out and hungover economy like we have now putting money back in the hands of those who can spend thorugh tax breaks is half the equation and the easy part. Getting them to spend what you give them is the tough part. Some will argue that you really can’t do it.

With money market funds and Cds around or under 1% and billions going into them, I’d tend to agree.

As the Japanese know the toughest part is restoring the confidence to spend. But, you can only control what you can control. You give the means and hope they do it.

8

Start a war, of course.

9

Sparking the economy can be done by the government helping business or by the government reducting the hindrances they already have put on businesses. The first category can work, but it is apt to be costly. E.g. reduced taxes on businesses would directly help them. Elimination of taxes on dividends would help the owners of businesses, thus encouraging businesses to start up or expand. Reduced taxes to individuals or payment of government money to individuals would indirectly lead to greater sales, thus helping businesses. These are traditional approaches to sparking the economy, but they tend to produce government deficits.

Reducing the burdens on business doesn’t cost any government revenue. E.g., Polycarp’s #2: “Redefine all regulations in terms of the desired outcome.” Assuming that this led to less burdensome regulations, it would make it easier for businesses to start up or to expand. No doubt many other regulatory reforms are possible and desirable. Another useful step would be to institute tort reform, so as to reduce the burden of lawsuits on businesses.

10

Dear God. You guys in GD are so bent on your ideological points that you can’t even make simple factual statements.
How to stimulate an economy is pretty simple and well known:

1 - Engage in deficit spending, the more the better.
2 - Lower interest rates.
3 - Devalue the currency.

All three are actively being accomplished as I write this. That they are being done with a right wing slant rather than a left wing slant is relevant to the political process and the outcome re income inequality, but it’s irrelevant to whether the economy will be stimulated from the actions being taken.
Bush & Co. have the pedal to the metal. They’re driving the car to the right as they do this, but they do still have that pedal floored. In about six months to a year, you’ll see definite results. Whether that will be in time to get Bush re-elected we’ll find out in Nov 2004.
The points covered in the OP are more long term questions than short term ones. I agree very strongly with number 2, because it encourages innovation at the same time as it accomplishes what is presumably a social good. But the effects would be felt over multiple business cycles.
As for the usual shibboleths that get carted out, the most idiotic one is the one about how the government “subsidizes failure”. What a load of BS. The government has subsidized real estate in every way possible for the last 50 years. If you really think this has been a failure, you’re living in a different country than the one I inhabit.

11

Pantom:

Perhaps you were not living in the country that had to bail out a huge portion of the S&L industry in the 80s/90s.

12

Oh please. Read this, and tell me this is a sign of failure:

http://www.realtor.org/publicaffairsweb.nsf/Pages/JanEHS03?OpenDocument

13

What’s my ideology?

Odds are you’ll find quite a few who disagree with this. Many will argue that the tax cuts are aimed at the rich who just so happen to have very low marginal propensities to consume, which in turn implies that spending will not go up by much. Everything taxed is spent, when the taxes decrease for a group with low MPCs it follows that spending should decrease as well. That’s not “pedal to the metal”. Stealing Scylla’s metaphore, some might argue that instead of taking aspirin or a hair of the dog for a hangover, Bush is hitting the economy in the head with a hammer.

Why is that? Will that make the companies more profitable or just cause a one off jump in stock prices. Here are my back of the envelope calculations:

Am I making an error? If so, then what is it? (Seriously!!) If businesses don’t become more profitable, why would they expand? I’m very curious about this.

14

You are comparing the wrong things. Let’s say know how to start a business that will produce a dividend stream of D per year in perpeturity. Assume that it would require a capital investment of D/r to get this company going. Under your model, at current tax rates, you would not make this investment, because the company would only be worth (1-T)D/r.

However, if the tax on dividends were eliminated, then the company would be worth D/r, so this would be a good investment.

15

The ability of a government to ‘stimulate’ the economy is very, very limited. We’ve been listening to politicians acting as salesmen for whatever economic package they are touting this week, and criticising their opponent’s packages, that we’ve come to believe that it’s the government that has its hand on the tiller of the economy, steering it through uncharted waters through sheer brilliance.

The fact is, the U.S. has a TEN TRILLION dollar economy. And yet, BIG government ‘stimulus’ packages are rarely more that 30 or 40 billion dollars. Bush’s big tax cut package is something like 80 billion dollars a year, it’s ‘back loaded’ to take effect in the ‘out years’. when the economy will be even bigger.

Take the Democrat’s plan to give every taxpayer a $300 cheque. That amounts to something like 45 billion dollars, which is .45% of the economic output for the year. So even if that money was created by the money fairy, that would be an increase in economic growth of .45%.

But of course, the money isn’t created by the money fairy. It’s taxed. So really, all the ‘stimulus’ does is move money from one account to another. Or the money is borrowed, in a classic Keynesian stimulus. But even that has costs, as debt repayment eats up more of the budget and interest rates increase.

So if you want to look for stimulus, you have to forget direct payments, and look for ways that the government can apply leverage to the broader economy. It can do that through monetary policy, by increasing or decreasing interest rates. But interest rates are so low now that there’s little room for the fed to move to stimulate the economy.

Another way to gain leverage is through regulatory policy. Regulation as a whole costs the U.S. economy about a trillion dollars a year. Now, some of the expenses of regulation would be there absent the regulations - we still need safe cars and clean water. But some regulations could be done away with or minimized. And minimizing regulation of certain industries would cause a disproportionate stimulus because it would encourage more investment.

Another way the government can apply leverage is through trade policy. Free markets cause economic expansion. Get rid of barriers to trade, both internal and external, and you’ll help the market.

Finally, the best way the U.S. can improve the economy right now is to take steps to make the world a more stable place for businesses to operate, and for capital to flow around the world. Winning the war on terror is the most important way to do that. In the short term, they should get on with the war in Iraq, because right now there is a heavy uncertainty risk in the market, both in stock depression and lack of consumer confidence.

Given all that, here’s Sam Stone’s recommendation for economic health:
[ul]
[li]Don’t cut taxes any further, other than the dividend tax cut. The dividend tax cut a good idea to eliminate a distortion in the marketplace which leads to speculation and inflated, unreal stock prices. But that’s enough of a cut. The deficits are getting big enough that they are going to start spooking investors. Don’t be surprised to see Bush backpedal on his tax cuts after the Iraq war is over.[/li][li]Work tirelessly to expand free markets.[/li][li]Enact a commission to go through the federal register and work towards eliminating unnecessary regulations and streamlining others.[/li][li]Get on with the war in Iraq, and win it. [/li][li]Re-think homeland security, and the damage some of the measures are doing to certain areas of the economy. In particular, a lot of work should be done to streamline security at airports, and for God’s sake, get rid of the ‘feel good’ practices that inconvenience people, like confiscating nail clippers.[/li][/ul]

On trade policy, there is a golden opportunity for the U.S. right now in Eastern Europe. Czechoslovakia just elected a Prime Minster, Vaclav Klaus, who is a libertarian-oriented disciple of Friedrich Hayek and Milton Friedman. The Vilnius countries are aligning behind the United States, with the Czech Republic taking the lead. The ‘old Europe’ countries of France and Germany, and their stagnant socialist economies, are lining up on the other side.

The U.S. should take this opportunity to extend NAFTA into a transatlantic free trade zone, and invite all European countries to join. But make sure it’s real free trade, and not some quasi-regulated EU trade zone or something.

16

Pantom:

Oh please yourself, you pompous fool. Go back and read my post. I said the gov’t TENDS to subsidize failure. You come out with one example of where the gov’t MAY have subsidized some success and you think you’ve won an arguement.

And any econ 101 class will tell you that a tax break for mortgages will simply raise the price of the house to account for the increased “saving” gained in the write off. While there may be some psychological effect of people leveraging themselves more than they otherwise would, it’s not clear in any sense that the extra money spend on real estate would have been better invested somewhere else.

If the gov’t had a better than 50/50 success ratio of subsidiznig success, I’d vote in the next socialist candidate in a minute. Somehow I don’t see that happening.

17

Getting testy, aren’t we?
Real estate happens to be where more families have more of their assets than any other class. The classic trajectory is to buy a house, pay it off, or at least most of it, then buy a smaller house for retirement and live partially off of the profits of selling the home you owned during your working life. For most people, it’s a very successful paradigm.
If you bothered to look up the figures instead of throwing around stupid insults, you’d see that this is one of the highest tax expenditures the government has. It’s been this way since the Dead Sea was sick. I’d give you a cite, as I have the figures at my fingertips, but I really don’t feel like giving you any more assistance in fighting your ignorance than that.
A few other examples, off the top of my head:

1 - The interstate highway system.
2 - The banking system, which, outside of your above-mentioned S&L debacle, hasn’t had a major crisis since the Great Depression. And that debacle didn’t have the kind of effect on the economy that the bank failures of the Thirties had, obviously.
3 - Social security, whose failure has been imminent for what? twenty, thirty years?

Think about that after you’re retired, when you travel down your Federally financed interstate to your FDIC insured bank, which may or may not be a member of the Federal Reserve system, to deposit your Social Security check, before heading out to the golf course.
BTW, this will be the very last time I say anything whatsoever to you. You can take that to the bank too.

18

John Mace:

[Moderator Hat ON]

John Mace, we don’t need namecalling in Great Debates. Quit it or Pit it.

[Moderator Hat OFF]

19

Actually, I was trying to think outside the ideological envelope, and while my particular ideas may not be the ones that work, at least I seem to have succeeded in doing so – I’m not sure when the last time december and I agreed on a political question before this thread, but apparently we’ve hit on one this time! :slight_smile:

20

Cut some programs that we dont (need).