Sunday, November 2, 2008

Thoughts on another stimulus package

With the economic outlook uncertain and pessimism rampant, talk is turning to the need for the government to "do something." Should we send out more tax rebate checks? Should we fund new infrastructure projects? Should we tax the rich more and give the money to the less fortunate since we know they are more likely to "spend" the money than the rich themselves?

The problem with all such schemes is that they don't do anything positive to change people's incentives to work and invest. They all rob from Peter to pay Paul. As a result, Peter can be discouraged from working harder, while Paul is encouraged to work less. These schemes also rest on the faulty notion that "demand" is the main driver of the economy. If it were, then we could all get richer just by spending more; we could spend our way to prosperity. Obviously that's not how prosperity happens. Prosperity (rising living standards) requires that we all produce more with a given amount of effort. And the only way that happens is if we become more productive, and that requires work, investment, innovation, taking risks, etc. Someone needs to figure out a better way to make computers or cars, or a better way to organize people.

What is needed is a plan that will increase the incentives to find more productive ways to do things. Cutting tax rates on the margin is the best way I know to accomplish that, because lower marginal tax rates (especially the tax rate on capital gains and dividends) increase the after-tax reward to taking risk. The late Jude Wanniski wrote extensively about taxes, incentives, and prosperity, and you can find hundreds of hours of instructive reading here.


Lynn W said...

Scott: Simply and elegantly put.

CDLIC said...

Is this not right on regarding actions by Governments in the marekts?

From Ayn Rand's "Atlas Shrugged" from the Money Speech:

"Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent but by compulsion, when you see that in order to produce, you need to obtain permission from men who produce nothing, when you see that money is flowing to those who deal not in goods but in favors, when you see that men get richer by graft and by pull than by work and your laws don't protect you against them, but protect them against you, when you see corruption being rewarded and honesty becoming a self-sacrifice, you may know that your society is doomed."

Scott Grannis said...

For any who haven't read it, I highly recommend "Atlas Shrugged." One of the great all-time classics. If I were teaching political science or economics, it would be required reading in my class.

CDLIC said...


After reading "Atlas Shrugged" at age 22, my Weltsicht was changed forever as has it for many since its publication in ‘56.

And I really like your required reading idea. The only downside is that in most institutions of liberal "higher learning" you certainly would end up eating lunch alone in the teachers lounge and shunned by fellow professors...but that wouldn't be all the much of a downside, would it.