A New Year & New Stimulus

Happy New Year. This blog, having had a brief Christmas and New Years haitus, turns two. On this newest day of the new year, my thoughts turn to the political economy. The new President is going to make an economic centerpiece of expanded Government spending, aka "stimulus spending".

Obama team's disorganization slows stimulus. A good thing, since the stimulus won't stimulate. Economist Backus says spending stimulus won't stimulate. He's right. Then there is the problem of finding out we are helping fat cats and not widows and orphans, e.g., Malkin: UAW's money pit.

What would work to stimulae the economy? Greg Mankiw points out that stimulus multipliers for tax cuts are much higher than for spending increases.

The obvious thing to do would be to make the Bush tax cuts permanent, and/or end the AMT, to eliminate uncertainty over future income tax rates. Greg Mankiw wants lower payroll taxes and to pay for it with higher gas taxes, sounds right up the alley of the 15% solution that we've proposed, to shift taxes from production to consumption.

How about a plan to allow FULL EXPENSING OF ALL CAPITAL INVESTMENT IN 2009 and 2010 and a cut in corporate tax rates?That would drastically incentivize capital spending in 2009 and 2010 - FedEx CEO Fred Smith proposes it:
Let us permit US companies to write off all their capital expenditures when they make them, as opposed to the current system of long-term depreciation. Why? Experts such as Ernie Christian and Gary Robbins have said that, over time, every dollar of tax cuts for expensing adds about nine dollars of gross domestic product growth. Even without counting the benefits to the economy of new jobs, it is a relatively cheap option for the US Treasury, since the only cost to the government is the time value of money.

The path the Obama Democrats will take will be a different one. Use the crisis as an excuse to ramp up more spending. Republicans need to say no to that.

We need a reminder that we don't want another New Deal or Great Society, because they didn't work the first time and won't work a second time. Another reminder that many of FDR's New Deal policies did economic harm:

"The purpose of the NIRA and NLRA was to promote labor and trade practice provisions so as to limit the extent of competition between firms and competition between workers. Among the NIRA codes that Cole and Ohanian highlight include minimum prices below which firms were not allowed to sell their products, restrictions on productive capacity and the amount that could be produced, and limitations on the workweek. Cole and Ohanian concluded on the basis of model simulations that these kinds of New Deal policies might have accounted for 60% of the persistence in the output gap.
... I openly confess to believing that government policies that were explicitly designed to limit manufacturing, agricultural, and mining output may indeed have had the effect of limiting manufacturing, agricultural, and mining output."

To recap, Obama and the Democrats will repeat prior failed policies to make it look like they are fixing a problem of Government's own making. They will then take credit for the results (hopefully good) and leave the taxpayer with the bill. Our only hope is that enough incompetence will intervene to slow down the train of ill-conceived policies.

Happy New Year.