Print ArticleWhile it´s always a good rule of thumb to be leery of what a politician tells you, never is that more accurate during an election year. This election year, both parties are telling us of a pending recession, and that they will provide the key to saving us from it.
It´s also important to be extra suspicious of what the politicians say when they´re working with bi-partisan agreement. Both sides have agreed to a ´tax rebate´ in order to pump money into the economy. Since the Republicans and Democrats both say this stimulus will work, then it must be true. Right?
Not so fast.
Since this ´stimulus´ is not a true tax cut, but a spending scheme, the government will need to borrow money in order to ´stimulate´ the economy. The money getting borrowed is taken out of the hands of entrepreneurs who would invest that money in equipment, buildings, and labor, which leads to less productivity, less growth, and less employment opportunities. Indeed, Dan Mitchell´s Heritage Foundation study on government spending shows, among other things, that increasing government spending by simply 1% decreases our economic growth by 0.143%, and a 1% increase in government spending as a percent of GDP increases unemployment by 0.36% (1).
Is this the kind of stimulus these politicians have in mind?
The more prudent thing to do is consult someone who knows what they´re talking about. Someone who won a Nobel Prize in large part for predicting the stagflation of the 1970s. Someone who provided the antidote for what it would take to get us out of that funk.
What would Milton Friedman do?
While Professor Friedman is no longer with us, his work laid the foundation for the economic growth we enjoy today. In his words:
"A far better way to stimulate the economy is to reduce government spending, taxes, and controls, leave more money in our pockets to spend or invest in accordance with our own values, and reduce distortions in the market that hinder us from doing so effectively (2)."
The tax cuts of the 1920s spurred unprecedented economic growth (3). The Reaganomics formula of lower income tax rates and domestic spending restraint, along with a more intelligent monetary policy from the Fed, raised household income for every income bracket and created 17 million jobs (4).
But these policies were focused on the long-term health of our country, not some quick-fix band-aid that values reelection over doing the right thing. Funny how that never weighs into the calculations of our "leaders" in government.
1. http://www.heritage.org/Research/Budget/bg1831.cfm
2. Bright Promises, Dismal Performance by Milton Friedman, pg 312
3. http://www.cato.org/pub_display.php?pub_id=3015
4. http://www.cato.org/pub_display.php?pub_id=1120
It´s also important to be extra suspicious of what the politicians say when they´re working with bi-partisan agreement. Both sides have agreed to a ´tax rebate´ in order to pump money into the economy. Since the Republicans and Democrats both say this stimulus will work, then it must be true. Right?
Not so fast.
Since this ´stimulus´ is not a true tax cut, but a spending scheme, the government will need to borrow money in order to ´stimulate´ the economy. The money getting borrowed is taken out of the hands of entrepreneurs who would invest that money in equipment, buildings, and labor, which leads to less productivity, less growth, and less employment opportunities. Indeed, Dan Mitchell´s Heritage Foundation study on government spending shows, among other things, that increasing government spending by simply 1% decreases our economic growth by 0.143%, and a 1% increase in government spending as a percent of GDP increases unemployment by 0.36% (1).
Is this the kind of stimulus these politicians have in mind?
The more prudent thing to do is consult someone who knows what they´re talking about. Someone who won a Nobel Prize in large part for predicting the stagflation of the 1970s. Someone who provided the antidote for what it would take to get us out of that funk.
What would Milton Friedman do?
While Professor Friedman is no longer with us, his work laid the foundation for the economic growth we enjoy today. In his words:
"A far better way to stimulate the economy is to reduce government spending, taxes, and controls, leave more money in our pockets to spend or invest in accordance with our own values, and reduce distortions in the market that hinder us from doing so effectively (2)."
The tax cuts of the 1920s spurred unprecedented economic growth (3). The Reaganomics formula of lower income tax rates and domestic spending restraint, along with a more intelligent monetary policy from the Fed, raised household income for every income bracket and created 17 million jobs (4).
But these policies were focused on the long-term health of our country, not some quick-fix band-aid that values reelection over doing the right thing. Funny how that never weighs into the calculations of our "leaders" in government.
1. http://www.heritage.org/Research/Budget/bg1831.cfm
2. Bright Promises, Dismal Performance by Milton Friedman, pg 312
3. http://www.cato.org/pub_display.php?pub_id=3015
4. http://www.cato.org/pub_display.php?pub_id=1120
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