Questing for Atlantis

Nixon is notorious for claiming that “We are all Keynesians now.” Listening to President Obama, Vice-President Biden, and numerous members of Congress, one could easily be mistaken for thinking that is true again.

We saw the rebate checks. We saw the bailouts. Now we’ve seen the biggest monstrosity of all – an $800 billion dollar “stimulus” package that could easily swell to over a trillion dollars if the temporary spending becomes permanent – and history has shown that frequently happens.

None of the others worked the way they were supposed to. But maybe this one will. After all, President Obama, Vice-President Biden, Nancy Pelosi, and Harry Reid have all been saying there aren’t any economists that disagree with the package.

That might be a convincing argument – if it weren’t a lie. Over 300 university economists have signed onto a statement urging the president to not sign the stimulus package into law – a fact the Cato Institute has been working hard to make people aware of.

300 economists not enough proof? How about history? Stimulus efforts failed to spur America out of the Great Depression. They failed to prevent Japan’s long recession in the 90’s. And they failed to do anything when Bush shoved them through a few years ago.

But let’s set aside the academic debate, look at the package itself and see if it would work, taking the Keynesian principles as a given.

Simply put, Keynes argued that a recession is a result of a decline in aggregate demand. Swift government spending can halt this decline. In real terms this means that the money in the stimulus package should be taking effect within no more than 18 months.

So what did we get? A disaster, even by Keynesian grounds. A massive portion won’t get spent this year, and as much as 40% of it won’t be in use for two years!

There’s nothing stimulative about the projects themselves. Congressional Democrats decided that rather worry about the economy they would seize the opportunity to lard up the bill with their spending wishlist.

As a result there’s plenty to be upset about. Contraceptives and landscaping for the National Mall got taken out, but public transportation funding, weatherizing houses, and a thousand other pork projects.

Those were pretty tame though. The bill also included such gems as a rollback of the 1996 welfare reforms and a new measure that will consolidate individual decision-making power in healthcare and give it to the federal government.

Few things in the stimulus are worse – or more dangerous– than the Buy American provision. Originally requiring that all stimulus projects exclusively use iron and steel produced in America, it was watered down when all our major trading partners threatened to throw up trade barriers of their own.

If President Obama and Congressional Democrats felt that we absolutely needed a stimulus – and I doubt that we did – they would have done well to craft a bill that would actually work.

The best way to achieve that would be small, but significant, permanent cuts in key taxes like payroll, corporate income, and capital gains taxes. These cuts would reduce the cost of doing business, allowing them to hire more people; let individuals keep more money so they can spend more; and lower the costs of investment, making it easier for businesses to expand.

Lowering barriers to investment and letting people keep more of their own money is how you bring a quick and healthy end to a recession. Passing a stimulus bill loaded up with pork and built on the failed Keynesian model isn’t.