Sunday, January 11, 2009

A Dose of Skeptism

Greg Mankiw, Harvard economics professor, pens a thoughtful critique of the Bush/Obama stimulus plan in yesterday's New York Times. (There, I said it. In a strange way, it seems that we are getting a third Bush term after all.) (I also note that those supposed bastions of liberalism, the NYT and Harvard, embrace free markets in their economics and business departments.)

His critique is that the multiplier effect for government spending is small, we can't be assured that the spending will be on anything really useful to society, it will lead to an inexorable increase in the size of government, and tax cuts would be more effective.

KT over at the Scratching Post has argued against tax cuts because past practice has shown that they only lead to higher deficits. In and of themselves, tax cuts don't slow government growth, and the ensuing deficits are bad for the economy. He has changed my mind on this subject. However, given that we are going to have some sort of "stimulus package," I would prefer that it come in the form of tax cuts, so that the money spent will at least be on useful goods and services.

To borrow from Mankiw's example, if the government hires you for $200, to dig a hole in your neighbor's yard and then fill it up, government statisticians will record your effort as economic activity and that the economy is improving. However, it is unlikely that your neighbor would spend a $200 tax rebate on so frivolous a project. But who would bet againsty the government doing so? Hence, my preference for tax cuts as stimulus.

Professor Mankiw's argument that the increased spending will result in programs that never end is well taken. From his article:

Rahm Emanuel, the incoming White House chief of staff, has said, “You don’t ever want to let a crisis go to waste: it’s an opportunity to do important things that you would otherwise avoid.”

What he has in mind is not entirely clear. One possibility is that he wants to use a temporary crisis as a pretense for engineering a permanent increase in the size and scope of the government. Believers in limited government have reason to be wary.

Enough said.

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